Mexico experienced the 1994 stock-market and currency crisis known as the Tequila Crisis. It began after pressure on Mexico’s peso and financial system intensified in December 1994.
Mexico had attracted large foreign capital inflows during the early 1990s, helping finance economic growth and investment. Much of the financing was short-term, while the country’s exchange-rate system limited the peso’s flexibility. Political instability, rising U.S. interest rates, and concerns about Mexico’s external position increased pressure on the currency.
The government devalued the peso in December 1994, but the move triggered a much larger loss of confidence. The peso fell sharply, domestic interest rates rose, and banks and businesses faced serious debt problems. The crisis spread to other emerging markets, producing what became known as the Tequila Effect.
The United States and international institutions assembled a major assistance package. Mexico’s economy eventually recovered, but the episode became a classic example of how short-term foreign borrowing and a fragile exchange-rate regime can amplify a market shock.