Explain clearly

III. The cost of serving hard currency debt: Mexico funded its current account deficit in the early 19905 by selling 40 Billion US S bonds. Mexico's currency was fixed to the US S. The average dollar interest rate on these bonds was i = 0.08, the principle payment rate is 0.07. Thereby, the annual debt service of the country was 0.15*40 Billion US dollar [15% = 8% interest rate, and 7 % principle payment]. The inflation was 2% in the US, and 5% in Mexico. A balance of payment crisis in December 1994 forces Mexico to depreciate its currency by 60%, increasing the inflation rate from 5% in 1994 to 20% in 1995. Calculate the impact of the crisis on the real cost of serving Mexican's debt in 1995 relative to 1994. Explain. Definitions