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. Foreign Currency Effects

    The gain or loss on foreign investments due to changes in the ...
  4. Floating Exchange Rate

    A country's exchange rate regime where its currency is set by ...
  5. Currency Risk

    A form of risk that arises from the change in price of one currency ...
  6. Globalization

    The tendency of investment funds and businesses to move beyond ...
RELATED FAQS
  1. What emerging markets are best suited for investing in the aerospace sector?

    The two best emerging markets for investing in the aerospace sector are China and India. Both countries have a rapidly expanding ... Read Full Answer >>
  2. What are some common risks that are unique to investing in the electronics sector?

    The electronics sector presents several potential risks for investors. Variable costs associated with production may vary, ... Read Full Answer >>
  3. What impact will growth in the emerging markets have on automotive sector?

    Continuing economic growth in the emerging market economies should have a very positive impact on the automotive industry ... Read Full Answer >>
  4. What other sectors are most highly correlated with the aerospace sector?

    Sectors that correlate closely with the aerospace sector include the aviation and defense industries. These industries all ... Read Full Answer >>
  5. Is there an index for tracking mid-cap stocks?

    There are several indexes for tracking mid-cap stocks. The most widely referenced is the S&P Mid-Cap 400, but others ... Read Full Answer >>
  6. What are common risks associated with investing in the aerospace sector?

    Investors considering the aerospace sector should carefully consider the challenges and opportunities the industry presents. ... Read Full Answer >>
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. Mutual Funds & ETFs

    Is the PowerShares (PFEM) ETF a Good Bet Now?

    What you need to know if you are considering trading PowerShares Fundamental Emerging Markets Local Debt ETF.
  6. Economics

    One Silver Lining Of Slower Global Growth

    Stocks struggled last week amid more evidence out of the world’s largest economies that global economic growth isn’t accelerating as expected.
  7. Mutual Funds & ETFs

    Anatomy of Emerging Markets Debt ETF (EMLC)

    This emerging market bond ETF offers a high yield, but there are dangers. Find out why.
  8. Mutual Funds & ETFs

    Financial Bear 3X (FAZ): Bull in a Bear Suit?

    Why the Financial Bear 3X Direxion ETF looks like a bullish bet.
  9. Mutual Funds & ETFs

    Invest in Emerging Market Currencies with this ETF

    Why this emerging market currency ETF needs to be on your radar.
  10. Economics

    How China's GDP Is Calculated

    China is the world’s second-largest economy based on its GDP figures. Investopedia explains the methodology behind China’s GDP calculation.

You May Also Like

Hot Definitions
  1. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  2. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  3. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
  4. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
  5. Wash Trading

    The process of buying shares of a company through one broker while selling shares through a different broker. Wash trading ...
Trading Center