Tequila Effect

AAA

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".

INVESTOPEDIA EXPLAINS '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. North American Free Trade Agreement ...

    A regulation implemented on Jan. 1, 1994, that decreased and ...
  2. Devaluation

    A deliberate downward adjustment to the value of a country's ...
  3. Globalization

    The tendency of investment funds and businesses to move beyond ...
  4. Foreign Currency Effects

    The gain or loss on foreign investments due to changes in the ...
  5. MXN

    In the currency market, this is the abbreviation for the Mexican ...
  6. Currency Convertibility

    The ease with which a country's currency can be converted into ...
Related Articles
  1. Currency Exchange: Floating Rate Vs. ...
    Forex Education

    Currency Exchange: Floating Rate Vs. ...

  2. 6 Factors That Influence Exchange Rates
    Bonds & Fixed Income

    6 Factors That Influence Exchange Rates

  3. What Is An Emerging Market Economy?
    Economics

    What Is An Emerging Market Economy?

  4. What Is The World Trade Organization?
    Economics

    What Is The World Trade Organization?

Hot Definitions
  1. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  2. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  3. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  4. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  5. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
  6. Earnings Multiplier

    An adjustment made to a company's P/E ratio that takes into account current interest rates. The earnings multiplier is used ...
Trading Center