What term describes Mexico’s 1994–95 financial crisis and stock-market collapse?

Mexico’s 1994–95 financial crisis and stock-market collapse is known as the Tequila Crisis.

The crisis began after Mexico devalued the peso in December 1994. Investors had become concerned about Mexico’s current-account deficit, short-term dollar-linked debt, political instability, and the country’s ability to defend its exchange-rate policy. Capital flowed out rapidly, putting pressure on the currency and financial system.

The peso lost much of its value, while Mexican interest rates and bankruptcies rose. The shock spread to other emerging markets, a transmission sometimes called the “Tequila Effect.” The United States and international institutions assembled a major support package to help Mexico meet its obligations.

The episode is also called the Mexican peso crisis. “Tequila Crisis” is the widely used nickname, not the name of a particular stock exchange or index. The event showed how quickly foreign-exchange pressure can become a banking and equity-market crisis when a country relies heavily on short-term external financing.