Which 1994–1995 crisis began when Mexico devalued the peso and triggered international market turmoil?

The crisis that began when Mexico devalued the peso in 1994 was the Mexican peso crisis.

Mexico had maintained a managed exchange-rate regime while financing a large current-account deficit with foreign capital. Political violence, uncertainty, and falling confidence made it harder to defend the peso. In December 1994, the government allowed the currency to devalue, but the announcement triggered a rapid loss of investor confidence.

Capital fled, the peso plunged, and Mexican borrowers faced severe difficulty repaying dollar-denominated obligations. The shock spread to other emerging markets in what was sometimes called the Tequila Effect. The United States and international institutions assembled a large rescue package to help Mexico meet its external obligations.

The crisis is distinct from the 1997 Asian financial crisis, although both involved exchange-rate pressure and capital flight. It also shows why a currency devaluation can damage companies and banks when debts are denominated in a stronger foreign currency. Mexico’s economy later recovered, but the episode caused a sharp short-term recession.