On December 20, 1994, the government of the newly elected Mexican president, Ernesto Zedillo, announced an effective 15 percent devaluation of the peso. He thus publicly acknowledged what the government had earlier tried to hide: The country's financial reserves were being exhausted. Global financial markets responded by stepping up speculative attacks on the peso, Mexican reserves dropped sharply, and two days later the government was forced to let the peso float freely. Further capital flight ensued, and the peso plummeted to levels below those of the 1982 debt crisis. Mexico's inflation rate soared to 40 percent, and the country fell into a recession from which it took painful years to emerge.

What befell Mexico was the scenario that played out in other countries in later years — in Asia, and in Russia and in Brazil. It also had predecessors, most notably in the Latin American debt crises of the 1980s. No two of these crises were identical — the ratio of public debt to private varied, as did the exposure of U.S.-based banks — but the broad outline was the same. In all cases, too much outside capital was seeking too large returns too quickly, based on too rosy assumptions either that nations never defaulted on their debts or that international patrons never let them.

The U.S. government responded to the immediate crisis with unprecedented financial actions. It authorized up to $20 billion from Treasury's Exchange Stabilization Fund (ESF), and it twisted the arm of the International Monetary Fund (IMF) to provide an $18 billion loan.