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.

  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. Currency Convertibility

    The ease with which a country's currency can be converted into ...
  4. Foreign Currency Effects

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

    A country's exchange rate regime where its currency is set by ...
  6. MXN

    In the currency market, this is the abbreviation for the Mexican ...
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