Mexico's financial crisis of 1994-1995

Abstract

This paper explains the causes leading to the Mexican crisis of 1994-1995 (known as "The Tequila Crisis"), and its short- and long-term consequences. It argues that excessive enthusiasm on the part of foreign investors, not based on Mexico's fundamentals, and weak regulation of the banking system built the vulnerabilities that left Mexico exposed to a sudden change in investor appetite for Mexican securities in 1994. Political violence in Mexico and changes in monetary policy in the United States then led to radical changes in investor perceptions of the future of the country and to a balance of payments and banking crisis. The paper then explains how the crisis unraveled and describes the US bailout of the Mexican government in 1995. Since the exchange rate crisis of December of 1994 then translated into a banking crisis in 1995, the chapter ends examining the subsequent development of the Mexican banking system.