European Union President Herman Van Rompuy says he’s tired of Mexico telling him how to resolve his region’s debt crisis. Credit-default swaps trading shows he’d benefit from the advice.
The cost of protecting Mexican bonds against non-payment held at a 15-month low of 1 percent Monday, half the 1.93 percent average for 15 Western European nations, according to data compiled by Bloomberg. The gap has increased about six times from 0.16 percentage point in September 2010. As recently as August 2010, it was costlier to protect Mexican debt against non-payment with credit-default swaps than European bonds.
Traders are more confident about Mexico’s ability to pay obligations as the economy grows almost 4 percent, versus a contraction in Europe, and the nation has half the debt relative to its size as the euro region. Central bank Governor Agustin Carstens said in July European leaders should speak with one voice and devote “far bigger resources” to deter speculators. Van Rompuy said Sept. 7 he’s fed up with “countries like Mexico preaching to us” when it has a “civil war at home.” Drug violence in Mexico claimed more than 47,000 lives since 2006.
“They should be taking advice from people who have real experience with similar problems,” said Jerome Booth, the London-based head of research at Ashmore Investment Management, which oversees $63 billion of emerging-markets assets. “The idea that organized crime in Mexico has any bearing on the issue of macroeconomic management is absurd. The amount of leverage in the European Union and the amount of policy denial are much, much worse than in Mexico.“
Ricardo Medina Macias, the central bank’s communications director, said Banco de Mexico declined to respond to Van Rompuy’s comments.
Yields on Mexico’s dollar bonds due in 2020 have fallen 96 basis points, or 0.96 percentage point, this year to 2.21 percent, according to data compiled by Bloomberg. They touched a record low 2.12 percent Aug. 10. Yields on Spanish 10-year bonds have climbed 31 basis points this year to 5.7 percent and reached an all-time high of 7.62 percent July 24.
Latin America’s biggest economy after Brazil will expand 3.8 percent this year, according to the median estimate of 23 economists in a Bloomberg survey. It expanded 3.9 percent in 2011. Mexico’s government debt will equal 42.9 percent of its gross domestic product this year, compared with 90 percent for the euro area, according to International Monetary Fund projections.
The 17-nation euro-area economy will contract 0.5 percent this year after expanding 1.4 percent in 2011, according to the median estimate of 39 economists surveyed by Bloomberg.
Carstens, who worked in the central bank’s economic research department in the 1990s, helped steer Mexico through the peso devaluation that sparked capital outflows across the region and became known as the Tequila Crisis. He said in an interview with Mexico City’s Radio Formula on July 24 that Europe might have solved its problems faster had it not waited two years to act.
“This delay has certainly been costly,” Carstens, 54, said.
He told a conference audience including European Central Bank President Mario Draghi in London on July 26 that Europe’s leaders need to improve communication with investors.
“You have to delineate very clearly what are your tactics, what are your strategies,” Carstens said in an interview with Bloomberg Television that same day. “It’s very important for Europe to talk with a single voice. Something that has eroded confidence in the market is that sometimes they come to some agreements and different ministers or central bank governors start degrading the agreement or conditioning the agreement. They need to have far bigger resources in such a way that markets will not dare to speculate against Europe or against a particular country.”
As finance minister in 2009, Carstens also guided Mexico through a 6.2 percent economic contraction sparked by the swine- flu scare and Lehman Brothers Holdings Inc.’s collapse. Mexico has boosted foreign reserves by 84 percent since then to a record $161.3 billion in the week ended Aug. 31. Standard & Poor’s and Fitch Ratings downgraded the country one level to BBB in 2009, citing declining crude output from state-owned Petroleos Mexicanos, the source of about a third of federal budget funding.
Mexico is “a good example of Latin America and good management of economic policy,” Henry Stipp, who helps manage $2.8 billion in emerging-market debt at Threadneedle Asset Management in London, said in a telephone interview. Mexico “is going to be upgraded if they really move ahead with the reforms” that have been proposed by the ruling National Action Party and President-elect Enrique Pena Nieto’s Institutional Revolutionary Party, he said.
The incoming president, who takes office Dec. 1, said he plans to overhaul labor and tax rules and allow more private investment in Mexico’s energy industry. The country nationalized its oil industry in 1938.
Drug-related violence is costing Mexico’s economy about 1 percentage point of growth per year, Miguel Messmacher, the Finance Ministry’s chief economist, said in an interview from Mexico City on July 10.
Jeremy Brewin, who helps manage more than $5 billion in emerging-market debt at Aviva Investors in London, said European swaps may fall below those of Mexico if the region’s policy makers show they won’t let one of their member nations default.
While the cost of protecting Mexican debt has tumbled relative to that of Europe over the past two years, the gap between them has narrowed from a record 236 basis points, or 2.36 percentage points, on March 12, according to data compiled by Bloomberg. The swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Draghi unveiled a plan on Sept. 6 to purchase an unlimited amount of sovereign bonds to regain control of interest rates in the euro area and fight speculation of a currency breakup. To trigger ECB purchases, governments in countries such as Spain and Italy need to request aid from Europe’s 500 billion-euro ($638 billion) rescue fund and sign up to conditions. Greece, Ireland and Portugal have all received bailouts in the past three years.
Van Rompuy’s comments weren’t the first time European leaders have chafed at Mexican advice. At a Group of 20 summit in Los Cabos on June 17, Mexican President Felipe Calderon said his nation was ready to help the region “overcome the problems currently being faced and to prevent similar events from recurring.” He made the comments after meeting with Van Rompuy and European Commission President Jose Barroso at the summit.
Barroso at the time said Europe’s leaders had “not come here to receive lessons” on democracy or the economy.
Carstens campaigned to become managing director of the IMF last year, saying a non-European leader would be able to speak more freely about the region’s debt crisis. French Finance Minister Christine Lagarde landed the job.
European leaders who have spent decades dictating fiscal and economic policy to Latin American nations in crisis and in need of bailouts are resisting their new place on the receiving end of advice, Ashmore’s Booth said.
“These are people who for decades have lorded over emerging countries and told emerging countries what to do all the time, and now they’re getting a bit of their own medicine,” Booth said. “What’s relevant here is not the history of Mexico, but what they learned from their mistakes and where they are now.”