A financial crisis, also known as the tequila crisis, that was originated in Mexico over the span of the years 1994-1995, and spread to Brazil and Argentina, igniting one of the most significant financial crises during the last couple of decades in the twentieth century. The crisis was caused by the sudden devaluation of the Mexican peso (MXN) in December 1994. The current-account deficit of Mexico was a perilous 7% of GDP and its foreign-exchange reserves sharply dwindled. As a result, the peso’s fixed exchange rate against the dollar deteriorated. The currency plunged by around 50% within six months, causing the local-currency value of the government’s large dollar-linked debts to bloat enormously and at this rate Mexico could not help but sliding into a deep recession.

The crisis hit the financial sector the worst. Piles of bad and fraudulent loans extended by the recently privatized banks were badly exposed. Many banks went bankrupt. Thousands of Mexican borrowers defaulted on loans (especially mortgage loans) as interest rates rocketed, and had their homes repossessed. In 1995 GDP shrank by 6.2%. But Mexico was salvaged thanks to its accession to the North American Free Trade Agreement (NAFTA), which had come into effect on January 1st 1994. U.S President Bill Clinton was of the opinion that Mexico, then America’s third-largest trading partner, must be given a helping hand because of its importance to American jobs and investment. Therefore, his administration arranged a $40-billion standby loan, not so much for the sake of philanthropy, but to protect the U.S interests.