Mexico Tequila Crisis Analysis

INTRODUCTION
The Mexican financial crisis of 1994-1995, also known as the “Tequila Crisis”, took place in December 1994 and is known as the first global crisis of last decade of the twentieth century. The crisis had little to do with the external debt situation and more to do with the short term foreign exchange problem which led to the devaluation of the peso against the U.S dollar. This action lead to the following significant outcome:
1. Worst banking crisis in the Mexican history.
2. Most devastating recession with GDP falling over 6% in 1995.
3. Largest depreciation of the currency, from 5.3 pesos per dollar to over 10 pesos per dollar. THE CRISIS AND ITS TRIGGERS
It is impossible to just point at one trend or event to explain the Mexican
The loan guarantees allowed Mexico to restructure its short-term public debt and improve market liquidity. IMPACTS OF CRISIS
Just after the devaluation of the peso, Mexico’s economy started to rebalance. The process of rebalancing proceeded quite fast. In the first half of the year, Mexico’s economy contracted by 10%. In the three years thereafter, the economy recovered rather well, with an average growth rate of almost 6%. Moreover, the current account deficit declined from -5.8% in 1994 to -0.5% in 1995. Along with the fall in GDP, unemployment rose from 3.7% in 1994 to 6.2% in 1995. But, as with the overall economy, the situation on the labor market improved fast, showing a decline to 5.5% in 1996.
The story for inflation was different. Due to the devaluation of the peso, goods and services from abroad became more expensive, pushing up inflation. In addition, given Mexico’s history of high inflation, the expected inflation shot up as well, worsening the inflation