Friday, April 24, 2015

Today's Mexico City Headlines: Could Mexico use a rainy day fund? In the amount, let's say, of $270 billion dollars? Not really. You see, we already got one. And it's very nice.

The central bank's annual report was presented to a Senate committee yesterday, which is not the kind of event likely to sell out the National Auditorium, even if they’re giving away Agustín Carstens T-shirts.
    But Carstens, the governor of what’s formally called Banco de México, did have something of a surprise up his sleeve. It turns out that the bank has been stashing away reserves, which have grown into an arsenal (Carstens’ word) worth $270 billion. That’s dollars, not pesos.
    It’s been no secret that Mexico has been trying to keep its reserves up, but the figure seemed to come as a surprise to a lot of legislators and was treated as front page news by all the major Mexico City dailies. Only Reforma leads with it, however, under the headline “Banxico boasts of anti-crisis shield.”
    Actually, almost half that shield is not cash but a line of credit with the International Monetary Fund. Still, it’s available, Carstens said, “to face any contingency.”
    So why is so much money just sitting there, while on the government side (the central bank is independent) they're cutting spending because of plunging revenue?
    As Reforma’s headline indicates, the idea is to help Mexico survive a crisis without having to turn to the United States for a bailout, as happened in 1995. (Actually, it was the Clinton administration, not “the United States,” that came through with an emergency loan that year, using special discretionary funds. Congress, newly installed after a Republican landslide the previous November, refused to lift a finger.)
    What the bank is worried about is heavy volatility resulting from an interest rate hike by the U.S. Fed, which just about everybody assumes is coming sooner rather than later. One scenario is a stampede of foreign holders of Mexican government securities, looking to cash out so they can earn more in the U.S. The shield, Carstens said, can cover that.
    It can also be used to bolster the peso should it start weakening even more than it has been. Use the dollars to buy pesos, and you increase the latters’ worth.
    It’s surely a good thing that Mexico is protecting itself from crisis. The problem is that when most people hear that, their first thought is, “So you’re saying there’s going to be a crisis? What, again?” What's supposed to be a confidence booster ends up making folks more edgy.
    The Banco de México governor also told senators that inflation has been under control, barely hitting 4% in 2014 and expected to come in under 3% this year. This was a little bit too much good news for the opposition, members of which insisted that the price of controlled inflation has been depressed salaries and a low standard of living for the majority of Mexicans.
    Carstens, a former finance secretary under President Calderón and one of two finalists for the IMF presidency in 2011, is not one often lost for an answer.
    “I’m sure that if the Banco de México hadn’t kept inflation low and stable, poverty would have been worse and incomes lower,” he said.

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