Mexican Peso Crisis (1994)

The Mexican peso crisis, often called the Tequila Crisis, was a currency crisis triggered by the Mexican government's sudden devaluation of the peso against the US dollar on December 20, 1994, after years of an artificially overvalued exchange rate and heavy reliance on short-term dollar-indexed government debt known as tesobonos. Political shocks, including the Zapatista uprising in Chiapas and the assassination of presidential candidate Luis Donaldo Colosio, accelerated capital flight in the months before the devaluation. The peso lost roughly half its value, inflation reached 52 percent in 1995, GDP contracted by 6.2 percent, and the share of Mexicans in extreme poverty nearly doubled. The United States organized a 50 billion dollar rescue package administered with the International Monetary Fund, the Bank for International Settlements and the G7, of which the eventual repayment returned the US Treasury a 600 million dollar profit. The crisis's contagion to other emerging markets became known as the Tequila effect and is widely studied as an early case of globalized financial crisis transmission.