Tequila Effect

DEFINITION of 'Tequila Effect'

Informal name given to the impact of the 1994 Mexican economic crisis on the South American economy. The Tequila Effect occurred because of a sudden devaluation in the Mexican peso, which then caused other currencies in the region (the Southern Cone and Brazil) to decline. The falling peso was propped up by US$50 billion loan granted by then U.S. president Bill Clinton.

Also referred to as the "Mexican Shock".

BREAKING DOWN 'Tequila Effect'

Immediately after the Mexican peso was devalued in the early days of the Presidency of Ernesto Zedillo, South American countries suffered rapid currency depreciation. It was a known fact that the peso was overvalued, but the extent of Mexico's economic vulnerability was not well known. Since governments and businesses in the area had high levels of U.S. dollar-denominated debt, the devaluation meant that it would be increasingly difficult to pay back the debts.

RELATED TERMS
  1. MXN (Mexican Peso)

    The currency abbreviation for the Mexican peso (MXN), the currency ...
  2. MXN

    In the currency market, this is the abbreviation for the Mexican ...
  3. ARP (Argentinian peso)

    The currency abbreviation, or currency symbol, for the Argentinian ...
  4. Crawling Peg

    A system of exchange rate adjustment in which a currency with ...
  5. UYU (Uruguayan Peso)

    The currency abbreviation for the Uruguayan peso (UYU), the currency ...
  6. CLP (Chilean Peso)

    The currency abbreviation for the Chilean peso (CLP), the currency ...
Related Articles
  1. Trading

    Why Greece, Oil and China Affect the Mexican Peso

    Discover how oil, Greece and China have all played a part in the rapid devaluation of the Mexican peso compared to other currencies.
  2. Markets

    What Are the Best Hours to Trade the Mexican Peso? (MXN, USD)

    The best times to trade the Mexican peso are centered around economic releases, typically in the morning hours.
  3. Markets

    Hamburger Economics: The Big Mac Index

    In theory, PPP stands up much better than it does in reality. Find out how to evaluate currencies according to the price of a Big Mac.
  4. Markets

    4 Economic Challenges Mexico Faces in 2016

    Learn how the Mexican economy improved in 2015 and why 2016 looks like a repeat. Find out why the biggest drag on the economy is still government corruption.
  5. Trading

    What Causes A Currency Crisis?

    Find out what can cause a currency to collapse, and what central banks can do to help.
  6. Trading

    3 Reasons The Mexican Peso Is So Liquid (MXN, USD)

    Mexico's vast petroleum reserves and close proximity to the United States add considerable liquidity to the Mexican peso.
  7. Markets

    How Does a Currency Peg Work?

    When a government initiates a currency peg, it pegs its currency’s value to that of another country.
  8. Trading

    This Might Be the Best Time to Buy Colombian Pesos

    Signs are growing that energy markets are bottoming out, allowing the Colombian Peso to recover its value in a profitable trend against the U.S. Dollar.
  9. Markets

    Explaining Devaluation

    Devaluation is the deliberate decrease in one county’s currency relative to the currency of other countries.
  10. Markets

    3 Reasons Why Countries Devalue Their Currency

    Ever since world currencies abandoned the gold standard and allowed their exchange rates to float freely against each other, there have been many currency devaluation events that have hurt not ...
RELATED FAQS
  1. What are the most common market indicators to follow the Mexican stock market and ...

    Learn the primary stock market indicators for the Mexican stock market and the leading economic indicators analysts use to ... Read Answer >>
  2. What are key economic factors that can cause currency depreciation in a country?

    Read about the causes of currency devaluation, and find out how to differentiate between relative and absolute currency devaluation. Read Answer >>
  3. Is it wise for me to invest $100,000 in real estate out of the country?

    I'm 56 years old. ... Read Answer >>
  4. How did Carlos Slim start America Movil?

    Dig deeper into the origin and history of America Movil, one of the largest corporations in the world and the dominant telecommunications ... Read Answer >>
  5. What are the typical day-to-day responsibilities of a Chief Operating Officer (COO)?

    Learn how a country's debt crisis affects the world, including how currency values, inflation and output are affected on ... Read Answer >>
  6. What are key benefits to a country that has engaged in a policy of currency depreciation?

    Learn about key benefits to a country engaging in a policy of currency depreciation, such as smaller trade deficits, employment ... Read Answer >>
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center