In 1994, the abrupt depreciation of the peso and the economic crisis that followed is generally known as the Mexican Peso Crisis today. The crisis is founded on its reaction to nearly a decade of economic stagnation and high inflation in Mexico. In response, the Mexican government liberalized the trade sector in 1985, and slowly recovered through market- oriented institutions beginning in 1987. As deregulation of the capital market and banking system began to occur, Mexico’s economy began to flourish. In 1993, Mexico’s inflation was under double digits. In addition, Mexico started to attract foreign investment. This was mainly due to low U.S. interest rates on borrowing, thus spurring a high amount of capital inflows. Yet, while the economy was expanding, so was the country’s deficit. The deficit had gone from $6 billion in 1989 to $20 billion in 1992 under Carlos Salinas de Gortari's administration. Nevertheless, the large and increasing deficit was starting to make investors worried that the peso was overvalued. This would have the potential to discourage exports, enlarge imports, and lead to a crisis in the future. In 1994, Mexico tried to continue to further Mexico’s economic expansion by reducing the trade barriers with the U.S. through the North American Free Trade Agreement (NAFTA). Nearly a year after NAFTA was implemented; the Mexican government was forced to devalue the peso. The crisis that followed resulted in the peso depreciating 50%, inflation rocketing, and a Mexican recession. Although the “Peso Crisis” occurred under President Ernesto Zedillo, its origin comes from the inaction and action of the outgoing Carlos Salinas de Gortari's administration. The major increase and availability in credit spurred the economy, until too much deregulation led to a currency crisis. Sufficient and sensible regulation and supervision were not in place any longer. This led to poor borrower screening, credit-volume excesses, and the inability of borrowers to pay off their debt. Mexico’s debt was mainly driven by freed borrowing rates, bank requirements being removed and non-performing loans. Mexico was promised $50 billion in loans and contributions, and would eventually return to its normal economy in 1996. The peso eventually evened out at 6 pesos per dollar, with Mexico repaying all of its loans by 1997.   Works Cited 1. The Origin of Mexico’s 1994 Financial Crisis (2009). The Cato Journal. Retrieved May 10, 2009 from http://www.cato.org/pubs/journal/cj17n3-14.html.