Why is 'The Market' so Unforgiving? Reflections on the Tequilazo
Why is 'The Market' so Unforgiving? Reflections on the Tequilazo
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Date
1996-09-21
Authors
Calvo, Guillermo A.
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Abstract
Mexico’s financial debacle and its impact on other emerging markets (the Tequila effect)
has raised many fundamental questions. Mexico achieved fiscal balance in 1993, undertook
several fundamental market-oriented reforms, signed a free trade agreement with a very large
market (the NAFTA), became a member of the OECD, and was hailed by international
institutions as a paramount example of successful reform. Yet, the December 20, 1994,
devaluation brought the economy down like a house of cards. Output fell by more than 7 percent
in 1995, the current account deficit sharply swung from about 8 percent of GDP in 1994 to zero,
and investors turned their noses away from high-yield Mexican public debt even though the
international community had plunked about $50 billion in a rescue package. In addition,
Mexican problems quickly spread around the world’s emerging markets, including those
exhibiting long and enviable track records.