In 1994 the Mexican government abandoned their crawling peg to the US dollar. This was brought about by a complicated sequence of events, but in this question we focus only on the dynamics of the last part of the crisis. Running low on dollar reserves in December of 1994, the Mexican central bank devalued the peso. However, unlike in our discussions in class, this devaluation was not credible - there was a spike in the risk premium investors demanded to lend to Mexico. The resulting increase in interest rates and contracting output ultimately led the government to abandon the peg.

How does a simultaneous devaluation and rise in the risk premium could lead to a scenario such as the one described above.