Delayed Financial Disclosure: Mexico’s Recent Experience

This article documents a delay in the public release of Mexican international reserve data in the months before Mexico’s debt crisis at the end of 1994. The article establishes that in that year investors did not know the level of Mexican reserves before October; yet this lack of information did not seem to reduce investor confidence in the Mexican economy. The article does not establish whether the delay in releasing reserve data was due to logistical problems or to a government strategy. The possibility that the delay was strategic is evaluated by developing an economic model that captures some of the principal constraints facing the Mexican government in 1994 and that makes explicit the conflicting objectives of the government and investors. The model shows that in such an environment with private information, strategic delay can occur in equilibrium if investors are uncertain about the cause of the delay. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. After several years of strong economic performance, Mexico suddenly suffered a financial crisis at the end of 1994. Within one month, the value of the peso fell by more than 35 percent and Mexican international reserves were depleted to the point that default on dollar-indexed sovereign debt looked imminent. One issue that has surfaced since the crisis is whether the government strategically delayed the release of data on its holdings of international reserves in the months before the crisis. Why are international reserves significant? From the perspective of investors, the stock of international reserves provides valuable information about the expected return on their investments. Investors may construe a low stock of international reserves as bad news that signals an impending devaluation or a possible default on sovereign debt, and they may choose to liquidate their holdings of Mexican securities. In this article, we document that there was bad news about Mexican international reserves in 1994 and that the public release of this news was, in fact, delayed. We contend that this delay was within the range of the market’s expectation based on its experience with Mexican reporting practices, but that the delay might have been an equilibrium strategic decision by Mexican policymakers in an environment with private information. To show that the release of reserve data was delayed, we consider the various channels used to convey data to the public and show that there was delay in each of these channels. While this evidence makes a compelling case that there were delays, it does not make clear whether these delays were due to logistical problems or were strategic decisions to withhold bad news. To evaluate the possibility that delays were strategic, we develop a model that captures some of the principal constraints facing the Mexican government and that makes explicit the conflicting objectives of the government and foreign investors. Our model shows that strategic delay can occur in equilibrium as long as lenders are uncertain about the cause of the delay.