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to 63 per cent in 1973 which largely absorbed the funds to facilitate activities of private enterprises (Buffie, Krause, 1989). This is another insight on how decadent the fiscal framework was and how it soaked up innovation and sophistication from the financial sector that could have transcended the financial environment into more competitive form.

Bank Sector and Stock Market Weaknesses

Mexico, for most parts, had a poorly developed financial markets comprising of weak banking system and stock markets. An empirical study conducted by World Bank in 1998 took a sample of 43 countries and measured the financial market development in terms of banking sector (Bank and Depth) and stock market (Liquidity and MCAP). In table 2, Mexico's Bank and Depth both ranked last (43rd) out of 43 countries, also stock market reflected similar results with Liquidity ranking 37th and MCAP 36th in the year 1970-1994.

Although Mexico experienced several changes during this phase and this ranking comprised some assumptions, it gives a snapshot of where Mexico stands among many other nations in context of financial repute. Studies show that Mexico's financial system has always been underdeveloped but it was not as economically deteriorated in the 60's as of the time since 1970's and 80's. This is because its financial system could not grow along with the international level which is why it set off into macroeconomic instability and the underdeveloped financial system further aggravated its susceptibility towards debt crisis in 1982.

External forces that led to Debt Crisis
The First Oil Shock (1973) and Petrodollar recycling

The sudden hike of oil prices is considered as oil shock and the first oil shock took place in 1973-1974 as clearly seen in Figure 1. This incidence affected Mexico in following ways (Cardoso and Fishlow, 1990): The immediate effect of first oil shock was that there was liquidity crunch and large trade deficits in the economy, so they needed to borrow more. Secondly, the international banks were flushed with excess cash deposited by OPEC (Organization of Petroleum Exporting Countries) which they eagerly loaned to developing countries including Mexico who were in need of funds.

To expand, OPEC gained surplus wealth because of oil price rise which were deposited in dollar accounts located outside US, known as Euro dollar deposits. At the same time, oil price rise caused large deficits which increased the demand of loanable funds in Mexico and other countries such as Brazil and Argentina. The international banks with superfluous deposits of oil receipts readily provided loans at variable rate. This formed a cycle of petro dollar recycling.

Mexico was one of those oil importing countries that made oil payments to OPEC, who in turn deposited them in dollar accounts at international commercial banks as seen in Figure 2. The excess dollar deposits were then recycled as loans by the international banks to many developing countries like Mexico and these countries became gradually dependent on these kinds of loans (GRIPS, 2010). A vicious cycle of excessive lending and borrowing was forming among the participating countries and institutions which structured the basis of debt crisis in the 1980's.

Second Oil Shock (1979)

The bubble exploded in the wake of the second oil shock (1979) (as can be referred to Figure