When NAFTA took effect on January 1, 1994, Mexico was a favorite of foreign investors, but outgoing president Carlos Salinas de Gortari’s government spent heavily to help his chosen successor, Luis Donaldo Colosio, and the current account deficit reached about 7% of GDP. To keep capital flowing, the Treasury shifted from peso-denominated Cetes to tesobonos, short-term bonds repayable in US dollars, and Chase Manhattan alone held an estimated $1.5 billion in Mexican securities. The Zapatista uprising in Chiapas and Colosio’s assassination in Tijuana in March drove money out, and the Bank of Mexico spent its dollar reserves defending the peso’s band rather than raise rates in an election year.

On December 20, 1994, 19 days after Ernesto Zedillo took office, the government devalued the peso; a tesobono auction then drew no buyers, and on December 22 the peso was allowed to float, falling from 3.40 to 7.20 per dollar. Panic spread across emerging markets as the tequila effect. With Congress refusing a rescue, Bill Clinton, Robert Rubin, Larry Summers and Alan Greenspan turned to the Exchange Stabilization Fund within a $50 billion international package, and the US loans returned a $600 million profit. In Mexico, GDP shrank 6.2% in 1995, inflation hit 52% and extreme poverty rose from 21% to 37%.

• The package combined $20 billion from the US Treasury, $17.8 billion from the IMF and $10 billion from the Bank for International Settlements.
• Rubin, a former Goldman Sachs co-chair, was scrutinized by the House Committee on Financial Services over the firm’s Mexican exposure.
• Unemployment rose from 3.9% to 7.4%, and real wages fell an estimated 25% to 35%.
• Urban workers were hit harder than rural households, with financial sector incomes down 48% against 17% in agriculture.
• Infant mortality rose 7% in 1996 as families cut spending on health care and nutrition.