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. Forex Education

    Currency Exchange: Floating Rate Vs. Fixed Rate

    Baffled by exchange rates? Wonder why some currencies fluctuate while others are pegged? This article has the answers.
  2. Bonds & Fixed Income

    6 Factors That Influence Exchange Rates

    Find out how a currency's relative value reflects a country's economic health and impacts your investment returns.
  3. Economics

    What Is An Emerging Market Economy?

    Emerging markets provide new investment opportunities, but there are risks - both to residents and foreign investors.
  4. Economics

    What Is The World Trade Organization?

    The WTO sets the global rules of trade. But what exactly does it do and why do so many oppose it?
  5. Investing in emerging market bonds might sound creative and fun, but sometimes it’s more profitable in keeping it simple and close to home.
    Mutual Funds & ETFs

    The EMB Emerging Market Bond ETF: Use Caution

    Investing in emerging market bonds might sound creative and fun, but sometimes it’s more profitable in keeping it simple and close to home.
  6. Promising high yields that the Eurozone and U.S. can't match, West African sovereign debt has caught the attention of savvy investors.
    Bonds & Fixed Income

    Interested In West African Debt? Look Here First

    Promising high yields that the Eurozone and U.S. can't match, West African sovereign debt has caught the attention of savvy investors.
  7. Two years into his first term, Mexican President Enrique Peña Nieto is following through on radical campaign promises he made to Mexican citizens for sweeping multi-industry reform.
    Investing News

    Mexicans Unsure about Mexican Reforms

    Two years into his first term, Mexican President Enrique Peña Nieto is following through on radical campaign promises he made to Mexican citizens for sweeping multi-industry reform.
  8. Economics

    Profiting From China's Breakout: The Right Funds

    China's prospects for growth, and for rewarding investments, can't be debated. Here are some worthwhile funds to invest in, and the smart way of doing it.
  9. American investors looking to diversify their portfolio to include Russian stocks can do so easily by purchasing shares of American Depository Receipts (ADRs).
    Investing Basics

    Top Russian Stocks For American Investors

    American investors looking to diversify their portfolio to include Russian stocks can do so easily by purchasing shares of American Depository Receipts (ADRs).
  10. American investors looking to diversify their portfolio to include Indian stocks can do so easily by purchasing shares ADRs of Indian stocks.
    Investing Basics

    Top Indian Stocks For American Investors

    American investors looking to diversify their portfolio to include Indian stocks can do so easily by purchasing shares ADRs of Indian stocks.

You May Also Like

Hot Definitions
  1. Christmas Island Dollar

    The former currency of Christmas Island, an Australian island in the Indian Ocean that was discovered on December 25, 1643. ...
  2. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  3. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  4. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  5. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  6. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
Trading Center