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. PHP

    In currencies, this is the abbreviation for the Philippine Peso.
Related Articles
  1. Forex Fundamentals

    What Causes A Currency Crisis?

    Find out what can cause a currency to collapse, and what central banks can do to help.
  2. Forex Education

    Forex Investing: How To Capture Commodity Fluctuations

    For individual or retail investors looking to gain exposure to hot commodity trends, the foreign exchange markets provide the answer.
  3. Fundamental Analysis

    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. Term

    How Does a Currency Peg Work?

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

    Explaining Devaluation

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

    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 ...
  7. Forex Education

    5 Foreign Currencies Americans Buy the Most

    Look at which currencies Americans buy the most for travel abroad and remittances, and how the current strength of the dollar is impacting those transactions.
  8. Forex Education

    6 Currencies With A Bright Future

    Have a rewarding new year by investing in these currencies.
  9. Stock Analysis

    Mexico: The China of the Americas

    While investors talk about BRICS and PIIGS and Tiger Nations and other dynamic developing economies, few have looked into the story going on just south of the US border, reports Nicholas Vardy ...
  10. Forex Education

    The Hazards Of Currency Movements

    Devaluation and revaluation are official changes in the value of a nation’s currency in relation to other currencies. The terms are generally used to refer to officially sanctioned changes in ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. What is the purpose of the International Monetary Fund?

    Read about the stated goals of the International Monetary Fund, which acts as an economic adviser and lender of last resort ... Read Answer >>
  4. How do you use a back-to-back loan?

    Back-to-back loans or parallel loans are a financial move used by companies to curb foreign exchange rate risk or currency ... Read Answer >>
  5. How do changes in national interest rates affect a currency's value and exchange ...

    Understand the role that changes in interest rates can play in determining the value and foreign exchange rate of a country's ... Read Answer >>
  6. What are some examples of diminishing marginal benefits in my personal spending?

    Learn what a marginal benefit is, why it diminishes, and read about two examples where a consumer can experience diminishing ... Read Answer >>
Hot Definitions
  1. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  2. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  3. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  5. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center