The North American Free Trade Agreement (NAFTA) entered into force, deepening Mexico’s trade and investment ties with the United States and Canada. The new openness helped attract foreign capital, but it also increased Mexico’s exposure to shifts in investor confidence.
PRI presidential candidate Luis Donaldo Colosio was assassinated during the 1994 campaign season. The killing added to political uncertainty, which can make investors more cautious about holding a country’s currency and government debt.
Ernesto Zedillo took office as Mexico faced falling international reserves and growing concern about how it would finance a large current-account deficit. These pressures made the existing exchange-rate policy harder to defend.
Mexican authorities widened the official intervention band for the peso, a step that effectively devalued the currency within the existing “band” system. Markets interpreted the move as a sign the government might not be able to keep defending the peso at prior levels, intensifying selling pressure.
After continued market pressure, the government stopped defending the exchange rate and allowed the peso to trade freely against the U.S. dollar. The peso fell sharply, and the crisis quickly spread into interest rates, bank balance sheets, and government financing needs.
Attention turned to Mexico’s short-term, dollar-linked government debt (often called tesobonos), much of which was coming due soon. With reserves low and investors pulling back, fears grew that Mexico could struggle to roll over this debt without outside help.
The U.S. executive branch determined that Mexico’s crisis created “unique and emergency circumstances” and moved to use the Exchange Stabilization Fund (ESF) to provide financial support. This helped create a backstop for Mexico’s access to dollars, aiming to stabilize markets.
The International Monetary Fund approved an 18‑month Stand‑By Arrangement for Mexico worth about US$17.8 billion. The IMF described the crisis as having “precipitated” the peso float in late December 1994 and framed the program around fiscal, monetary, and financial stabilization.
The Treasury Secretary and Mexico’s finance ministry signed agreements setting the legal framework for up to $20 billion of ESF support. The agreements included short-term and medium-term currency swaps and the option of securities guarantees, designed to help Mexico meet near-term financing needs.
Mexico’s Congress approved raising the value-added tax (VAT) from 10% to 15%, an important measure to strengthen government revenue during the emergency program. The tax increase was part of a broader push to stabilize public finances and regain market confidence after the float.
The Mexican Debt Disclosure Act became effective, requiring public reporting on U.S. financial assistance related to the crisis. The law reflected domestic controversy in the United States and increased oversight of how stabilization funds were used.
Mexico completed repayment of the U.S. government’s 1995 emergency loans ahead of schedule. The repayment helped mark the crisis period’s close: Mexico had shifted to a floating exchange rate and moved from emergency financing back toward normal market access.
Mexican Peso Crisis and the Peso Float (1994-1995)