| Abstract: | During the second half of 1993, when far-reaching structural reforms had left Mexican authorities bereft of policy instruments and macroeconomic stabilization had limited their policy options, two private Mexican banks were issuing short-term Euro-dollar debt at a cost substantially below the yield on dollar-linked government securities of similar maturity. A detailed analysis of the authorities’ policy dilemmas, together with a theoretical model that formalizes them, suggests that this negative spread represented arbitrage opportunities for the two banks. It further indicates that similar opportunities may arise again as more countries embark on programs of stabilization and reform. |
