The kind of record you don't want to set...

European banks set new records this past week for monies left on deposit overnight at the European Central Bank. It's another indicator of the intense concern about the denouement of the European sovereign and bank crisis.

Consumption buoyed the Mexican economy in Q3...

Consumption drove growth in the third quarter. Measured using the US reporting methodology (versus previous quarter, annualized), private consumption climbed 8.4% and government consumption, 8.8%. Investment rose 8.0%. Exports, in contrast, contracted 2.0%. 

Sound familiar?

From an article in today's New York Times:

"...Italian politicians, whose salaries rank above the European Union average and who are widely seen as more eager to protect their privileges than their country’s future, have balked at the prospect of belt tightening for themselves."

One British view of the choice confronting Germany...

Martin Wolf of the The Financial Times concludes that Germany's choices are these...

"Germany must choose between a eurozone disturbingly different from the larger Germany it expected, or no eurozone at all. I recognise how much its leaders and people must hate this choice. But it is the one they face. Chancellor Angela Merkel must dare to make that choice, clearly and openly."


For his analysis, see 
http://www.ft.com/intl/cms/s/0/c3085eb4-202d-11e1-9878-00144feabdc0.html#axzz1gXTdpMke

The ECB cuts again...

The ECB cut the interest rate another 25 basis points today, leaving the rate at 1%. It's the second 25 basis point rate cut in less than five weeks. The first reversed the 25 basis point increase in July under former ECB President Jean-Claude Trichet; it occurred the second day of Mario Draghi's brief tenure as the new head of the ECB.

What does this mean for Mexico?

First, it's a signal of just how fragile the situation in Europe is. The two rate reductions are an abrupt about face of ECB policy and demonstrate that the central bank is much more concerned about a recession than inflation at this point in time. Today's rate cut was accompanied by measures to keep the inter-bank lending market moving, another indication that European banks are facing severe funding pressures. If Europe blows, it will hit growth in Mexico.

Second, the odds that Banxico will reduce the Mexican reference rate in the first quarter of 2012 are substantially higher. Not that a lower interest rate is going to be terribly effective in offsetting the impact of a European crisis...

"Full of sound and fury,"

Shakespeare finished his famous line with "signifying nothing". We have to hope that the meetings Europe's leaders are holding this week have a different ending than Shakespeare's. Otherwise, it's hard to imagine anything other than some variant of the fourth quarter of 2008 playing out in the markets.

That the IMF will be able to forestall the turmoil the markets fear is unlikely. The Fund's available resources don't quite cover the debts Italy and Spain must rollover in the next six months. The US Treasury has already indicated it doesn't look favorably on proposals to increase the Fund's lending capacity.

That S&P is on the verge of downgrading all European sovereigns, including France and Germany, suggests just how dangerous the situation is.

The only realistic option to avoid a meltdown is if the European Central Bank (ECB) can act as lender of last resort for the EU. It's up to Germany.  

Is the end near?

Do two consecutive good days in the markets mean the danger of a meltdown is past? Unfortunately, not. Stock prices in the US and Mexico are reacting to the 4-5% drops of last week (in dollars, the IPC lost 8.3%) and to the hope that the very real possibility of collapse will be the spur European leaders need to allow the European Central Bank to buy government debt. 


A report issued November 25 by Japan's Nomura Bank underlines just how dire the situation is. Analysts warned that “(T)he euro zone financial crisis has entered a far more dangerous phase.... a euro breakup now appears probable rather than possible" unless the European Central Bank comes to the rescue.

So, who cares?

The "Super Committee" that was supposed to deliver a deal to reduce the US deficit failed to reach agreement. Judging by level of interest rates on the 10 year US Treasury bill, not all investors are concerned: today's yield is 1.94%, even lower than when there was still hope that the Super Committee could fulfill its mission. Stocks took a beating, however.

What are investors concerned about? Europe and growth prospects.

When a liquidity problem becomes one of solvency...

Events in Europe are moving faster than imagined. On October 27, European leaders announced the breakthrough that had eluded them for so many months. They agreed on a loss-sharing formula with Greece's bankers and to two critical preventative measures, enlarging the rescue fund and raising capital standards for banks.

Just over two weeks later, the Greek and Italian leaders resigned in response to market pressure, spreads on French debt (over the equivalent German bonds) have widened to their highest level since the adoption of the Euro in 1999, and the fate of the Euro and the European Union are being seriously discussed.

Investors have seemingly become hyper-sensitive to risk, at least in Europe. A run on any country can abruptly convert a sustainable situation into one that is not. A self-fulfilling prophecy can turn a liquidity problem into one of solvency. That is the danger Italy and European banks are facing today.

Sovereign debts aren't European banks' only problem...

European banks have been much slower than US banks to write down the value of their US mortgage-related loan portfolios. Here's an interesting table from the Wall Street Journal:

Activos sospechosos

	Activos mercado de crédito	Deuda soberana
RBS	79.600 mill. de euros de euros	10.400 mill. de euros
HSBC	54.300	14.600
Deutsche Bank	51.900	12.800
ING	36.000	11.200
CRÉDIT AGRICOLE	28.200	16.700
SOCIETE GENERALE	27.500	18.300
COMMERZBANK	23.800	19.800
BARCLAYS	20.700	20.300
BNP PARIBAS	12.500	41.100
NATIXIS	9.300	8.500*
UniCredit	7.200	51.800

*Incluye Grecia, Irlanda, Italia, Portugal y España

Exposición soberana se refiere a la matriz de Natixis, Groupe EPCE
http://www.elnorte.com/WSJAmericas/articulo/657/1313701/default.asp?plazaconsulta=reforma&EsCobertura=true&DirCobertura=Suplementos/wsjamericas&TipoCob=2

The euphoria didn't last long...

Italy is under attack just twelve days after the announcement that European leaders had agreed on a new plan which included a 50% haircut on Greek sovereign bonds. Yields on Italian debt are heading towards 7%, the highest Italy has paid since adopting the Euro. 7% seems to be a magic line: once they crossed it, Portugal, Greece and Ireland found themselves forced into adjustment programs designed by the "troika" (European Commission, ECB, and IMF).

The ECB cut the European reference rate by 25 basis points (1/4%), to 1.25%, two days after Mario Draghi assumed the bank's presidency. The reduction is a major change in ECB policy and an implicit recognition of the fragility of Europe's economic situation. The ECB's decision raises the odds that Banxico will reduce the Mexican reference rate in the first half of next year.

Volatility will continue to be the defining characteristic of Mexican exchange and equity markets.

Surprised that the market for luxury goods is growing?

After seeing this graph based on US data, you won't be. It would be fascinating to see the breakdown for Mexico....

Source: http://krugman.blogs.nytimes.com/2011/11/03/inequality-trends-in-one-picture/?nl=opinion&emc=tyb2

The deal behind stocks' latest roller coaster ride

Europe’s leaders finalized a deal in the wee hours of October 27. It avoids a default by Greece, addresses banks’ capitalization and “ring fences” Italy and Spain against contagion. At least, that’s what it’s supposed to do.

Markets reacted with euphoria. Stock markets in the U.S. and Mexico staged strong rallies on the 27^th. The Dow soared 2.9% and the IPC, 8.1% in dollars. That day the cost of a dollar fell to its cheapest price in five weeks, a 2.2% appreciation.

Of what does the deal that awakened such hopes consist? First, investors holding Greek government bonds accepted a 50% reduction in the value of the bonds. Second, European authorities agreed that the core capital requirement for banks will be raised to 9%. Third, using leverage, governments will increase the size of the European Financial Stability Facility (ESFS) from the pre-agreement 440 billion Euros to 1.0 trillion. That should backstop Italy and Spain’s borrowing needs, preventing a run on those two countries. 

The “sugar high” didn’t last. Stocks pretty much held their own on the 28^th then, on the next and final trading day of the month, the 31^st, gave around 2 percentage points. 

Even so, October was a very good month in markets that hadn’t really seen a good month since the first quarter. In fact, October was one of Wall Street’s best months in years. The Dow’s 9.5% gain was its largest in nine years; the S&P 500’s 10.8% climb was its biggest since December 1991; the Nasdaq’s 11.1% jump was larger still, its best in thirteen months. The IPC did best, posting a hefty 13.0% gain in dollars in October. 

Paul Volker's analysis of how we got where we are...

Excerpts from his Taylor Lecture:

"Now, we know all the seeming mathematic precision brought to task, epitomized by calculations of Value at Risk, complicated new structured products, the explosion of derivatives, all intended to diffuse and minimize risk, did not bear out the hopes. Instead the vaunted efficiency

helped justify exceedingly narrow credit spreads and exceedingly large compensation. By now it is pretty clear that it was faith in the techniques of modern finance, stoked in part by the apparent huge financial rewards, that enabled the extremes of leverage, the economic imbalances, and the pretenses of the credit rating agencies to persist so long. A relaxed approach of regulators and important legislative liberalization reflected the new financial Zeitgeist.

If those remarks sound critical – and they are meant to inspire caution - let me emphasize that the breakdown in financial markets and the “Great Recession” are the culmination of years of growing, and ultimately unsustainable, imbalances between and within national economies. These are matters of national policy failures and the absence of a disciplined international monetary system."

"..the build-up in leverage, the failure of credit discipline, and the opaqueness of securitization -- all the complexity implicit in the growth of so-called “shadow banking” -- helped facilitate accommodation to the underlying imbalances and to the eventual bubbles to a truly dangerous extent. In the end, the consequence was to intensify the financial crisis and to severely wound the real world economy."

For the full text of the Taylor Lecture, see: 

http://graphics8.nytimes.com/packages/pdf/business/23gret.pdf

What a difference a month can make...

How quickly or slowly the US economy grows makes a world of difference to Mexico's growth prospects. So, the results of Macroeconomic Advisers' latest weekly survey bring good news for Mexico. In mid-September, the economists surveyed projected the US would grow at a 1.7% annualized rate in the third quarter. Now, the projection is 2.7%, with some going so far as 3%. 

If you vote in the US or are interested in the US debate over tax plans

you'll want to see the summary of the analysis of Herman Cain's "9-9-9" tax proposal, done by the reputable Tax Policy Center. Here's the link:

http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=3222&DocTypeID=2

The bottom line: Tax rates would rise for the bottom 90% of taxpayers to 23.3%; 99% of taxpayers would pay a 20% rate or higher. The top 1% of taxpayers would pay a 17.9% rate and would see their tax rate cut by 13.5%; the cut for the top 0.1% would be 17.2%.

Why it still feels like a recession to so many Americans...

If you sell to the US, know the changes in your market.

The conclusions from a study by former, long-term employees of the Census Bureau  on median household income in the US, pre- and post Great Recession include the following:

After the "Great Recession" ended, US household income continued to fall. Between June 2009 and June 2011, median annual household income in the US fell 6.7% to $49,909. During the recession -- between December 2007 and June 2009 -- the decline was 3.2%.

The impact differed by race, by age, marital status, type of employer, and education.

Race: In 2011, the median annual household income for non-Hispanic whites was $56,320, 7.8% less than in June 2007. For Hispanics, median annual household income was $39,901, a 6.8% decline. Blacks' household income declined 9.2%, to $31,784.

Age: Inflation-adjusted income declined for households headed by people under 62. It rose 4.7% for households headed by people 65-74. There was no significant change for household headed by people 62-64.

Employer: Median annual income dropped 12.3% (adjusted for inflation) for households headed by the self-employed. The decline was 4.3% for private sector workers and 3.7% for government workers.

Marital Status: Income declined more for men living alone than for women living alone. The decline was largest for family households.

Education:  Median annual income for households headed by people who have:
not completed high school:     $25,157    - 7.9%
Associate’s degree:                $53,195    -14%
BA or more:                          $82,846    - 8.6% 

The unemployed stay that way...

A study by Princeton University Professor Henry Farber reports that people in the US who lost jobs in the recession and found new ones made an average of 17.5% LESS. The average length of time people are unemployed in the US has steadily risen. In December 2007, the average length of unemployment was 16.6 weeks. In June 2009, it was 24.1 weeks. In September 2011, it was 40.5 weeks, the longest in more than 60 years.

Political time and market time...

The IMF and World Bank meetings in Washington brought more verbiage about governments' commitment to growth and to austere fiscal policy. Fortunately, by the end of the meetings, it looks like the world assemblage of economic policy-makers and financiers also managed to convince European policy-makers that they don't have until they met again in November to get a grip on the crisis that sent markets into another tailspin last week.

That Europe's leaders realize markets don't operate at the same ponderous pace as building a political consensus often requires is a positive step. One can only hope that a sense of urgency will enable Europe to sidestep the financial meltdown towards which it is otherwise headed.

Meanwhile, volatility will be the norm and the peso will remain closer to $14 than the below $12 levels we'd seen just a few months ago.

Coming back from the puente...

When Mexican markets re-opened following the Independence Day celebrations, the peso (fix rate) burst through the $13 barrier to $13.19. The uncertainty and fears of developments in Europe are hammering the exchange rate. This is the downside of portfolio investment flows. 

Central banks pull together: the good news and the bad

Markets climbed on yesterday's announcement that five central banks will lend dollars for three months at fixed rates through the end of the year. The facilities ease the immediate liquidity problems some European banks face but the underlying message is not so positive. It underscores that the measures taken by the European Union and the IMF to date have NOT contained the crisis, which is fast engulfing the banking system. 

From the IMF, no less...

Research by the IMF "reverses earlier suggestions in the literature that cutting the budget deficit can spur growth in the short term." In the best of cases, it's going to be a slow recovery. Here's the link to the article:


http://www.imf.org/external/pubs/ft/fandd/2011/09/Ball.htm

Fasten your seat belts...

Fasten your seat belts...

The European crisis is snowballing. If the question were just whether European governments can act in time to prevent a full-fledged run on Italy and Spain, it would be be bad enough. That the Europeans don't agree on what needs to be done to prevent a re-run of the post-Lehman crisis makes these days much more frightening. An already ugly situation is getting uglier by the day.

Mexico is feeling the fallout. At the beginning of August, the fix rate was a peso lower than it was today, Monday, September 12. The IPC (Mexican stock index) has dropped 2,000 points. Expectations about interest rates have changed dramatically: if the Banco de Mexico moves the Mexican reference rate before the end of next year, odds are that it will lower it, not raise it. 

It's not just the financial markets that have been hit. With US growth projections being cut, Mexico's projected growth rate has been reduced. Growth should still receive a boost next year from the presidential election but it won't be enough to counteract the dampening effect coming from the US.

Whew...

Germany's highest court ruled on Wednesday that a panel of the German Parliament must approve the country's participation in any significant actions to be undertaken by the European Financial Stabilization Fund (EFSF). Compared to what might have been, that's a relief: the Court could have required any decisions to be approved by a vote of the Parliament. In situations like financial crises, in which rapid action is indispensable, the requirement of a parliamentary vote would have been a killer. 

Expect volatile markets this month...

The peso (fix rate) hit $12.54 on September 5. At the same time, the outgoing and incoming presidents of the European Central Bank called for a common fiscal policy with teeth and rapid action by Europe's leaders on the sovereign debt crisis.

All eyes are on the ruling Germany's high court is expected to issue on Wednesday. If the Court requires that the German Parliament approve the country's participation in any important decision made by the European Financial Stability Fund (EFSF), it could significantly slow the process of implementation. The length of time necessary to implement decisions is already a problem: it's hoped that the decision made in July to allow the ESFF to buy bonds issued by European governments will be approved by the member countries' governments before September is over.

Slower reaction time is a sure fire recipe for making a financial crisis worse.

What happens in Germany can affect the the peso.

Make you nervous?

Recently installed head of the IMF, Cristine LaGarde, told the elite of economic policy-makers gathered at Jackson Hole that economic risks "have been aggravated further by a deterioration in confidence and a growing sense that policymakers do not have the conviction, or simply are not willing, to take the decisions that are needed.” The former could be remedied by the latter. In the same venue, Fed President Ben Bernanke politely chastised Congress for the debt ceiling debacle and as clearly as a central bank president is ever likely to say so, argued for a fiscal stimulus to save the economy from falling into a prolonged  slump. 


The odds on the "worst case" scenario are rising.

Easy come, easy go...

Foreign investment poured into Mexican government peso-denominated money market obligations in the first five months of this year: through May, it totaled US$17.58 billion. As concerns about the vitality of growth in the US and Europe as well as fears over the Europe-centered debt crisis revived during the summer, Mexico felt the backlash. In June, for the first time since May 2010, foreign investors pulled money out of government money market instruments -- US$0.89 billion.  Inflows into Mexican money market instruments in the second quarter still totaled US$6.15 billion (a billion dollars more than FDI in the quarter), but 41.7% less than in the first.

Any guesses about what the July and August figures will show? Looking at the peso's slide, my money is on big outflows....

Mexico's growth...

The second quarter GDP figures published on Friday report an economy that grew 3.3% compared to the second quarter of 2010. That's the lowest year-over-year growth rate since the fourth quarter of 2009, when the economy contracted 2.0%.

If Mexico's growth rate is reported using the same methodology as the US headline growth rate (measured against the previous quarter and annualized), the Mexican economy grew 4.5% in the second quarter, not such a bad performance at all. In fact, the second quarter growth rate exceeded the "versus previous quarter" growth rate in both the first quarter of this year and the first and third quarters of 2010.

The "versus previous quarter, annualized" methodology is especially useful for capturing turning points in the economy's performance. From this perspective, the secondary (industrial) sector of the economy grew 5.3% in the second quarter, outpacing its growth in the previous three quarters. The tertiary (services) sector grew 3.9%, an acceleration with respect to that of the first quarter.  The drag on growth, for the second consecutive quarter, was the primary (agricultural) sector, which contracted 9.8% in the second quarter.

The industrial sector drove growth in the second quarter -- in spite of the impact of the Japanese tsunami. Is it surprising that fears that the US is in for a spell of weak growth or even recession have led so many other analysts to cut substantially their growth projections for Mexico this year?

A herculean task...

In the US, the twelve members of the newly created Joint Select Committee on Deficit Reduction have until November 23 to come up with a workable plan to achieve a US$1.5 trillion reduction in the deficit over the next ten years. The Committee can recommend measures to increase revenues as well as expenditure cuts.

The Committee is chaired by Senator Patty Murray (Dem., Washington). It is comprised of six Democrats (three senators and three representatives) and six Republicans (four senators and two representatives).

Why $1.5 trillion? Because when Congress agreed at the very last minute to raise the debt ceiling by US$2.4 trillion, they also agreed to cut US$0.9 billion (also over ten years).

Not only do seven of the twelve committee members have to agree on where to cut government expenditures, they have to come up with a plan that Congress will approve and that enjoys credibility in the markets and with the ratings agencies.

There are two reasons, apart from the market reaction to the budget brinksmanship, to think that the Select Committee might possibly manage to do what Congress and the President couldn't. One is that the plan, which must be voted on by December 23, is subject to an up or down, take it or leave it vote. Neither amendments nor filibusters will be allowed. That strategy worked in several decades ago when Congress confronted the politically tough question of which military bases to close in the US.

The other reason is that if the Committee doesn't come up with a plan or the plan is not approved, the government must automatically enact across the board spending cuts. The "trigger cuts" would hit both defense and domestic programs, the idea being that everybody's ox would get gored.

Here, courtesy of Catherine Rampell via Maplight, are the industry and organizations that  contributed most to the Select Committee's members.  (http://economix.blogs.nytimes.com/2011/08/15/who-pays-the-supercommittee/?ref=jointcongressionalcommitteeondeficitreduction) 

Top 10 Industry Contributors to Supercommittee Members

Industry	Totals
Lawyers/Law Firms	$31,529,149
Securities & Investment	$11,221,416
Democratic/Liberal	$9,647,264
Health Professionals	$9,321,588
Real Estate	$8,793,350
Education	$8,568,460
Misc. Business	$7,902,021
Business Services	$6,563,524
Women’s Issues	$6,396,728
Insurance	$5,693,595

Top 10 Organization Contributors (PACs and Employees) to Supercommittee Members

Organizations	Totals
Club for Growth	$990,066
Microsoft Corp.	$810,100
University of California	$629,495
Goldman Sachs	$592,684
EMILY’s List	$586,835
Citigroup Inc.	$561,081
JPMorgan Chase & Co.	$494,316
Bank of America	$349,566
Skadden, Arps, et al.	$347,356
General Electric	$340,935

Financial markets: 2008 and now...

A fascinating series of graphs, courtesy of the New York Times, can be found at this link:

http://www.nytimes.com/interactive/2011/08/11/business/economy/20110811-the-stock-market-then-and-now.html?nl=todaysheadlines&emc=tha2

Has the sky fallen?

No, but the bottom seems to have dropped out of the stock market. Market reaction to the last minute resolution of the self-induced US debt ceiling crisis and S&P's downgrade of the US from AAA to AA+ status (yes, it's spawned bad battery jokes) serves to remind how vulnerable exchange rates, stock prices and capital flows are to confidence. 


To my mind, the key phrase in S&P's announcement is this one:

"More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011."

Whew...

At the very last minute, the US increased the debt ceiling, averting a default. It's not so clear the US will avoid a downgrade of its debt rating. The markets weren't overly impressed by the resolution: on August 2, the Dow posted its 8th consecutive day of losses, dropping 2.19%. The Nasdaq and S&P 500 didn't do any better, falling 2.75% and 2.56%, respectively. In Mexico, the peso weakened 0.12% against Monday and the IPC dropping 2.56% in pesos.

Obviously, it's going to take more substantive efforts to confront the twin dangers of a weak economy and unsustainable deficit to re-establish faith in the US as a triple A player.

Can the President raise the US debt ceiling?

A sentence in Section Four of the 14th Amendment to the Constitution states: "The validity of the public debt of the United States, authorized by law, including debts incurred for payments of pensions and bounties for services in suppressing insurrection or rebellion shall not be questioned.”


Legal scholars are debating whether the President can invoke Section Four to unilaterally authorize an increase in the debt ceiling. Former President Clinton has stated he would. President Obama has voiced reservations over the applicability of an amendment to the Constitution written to deal with debt obligations stemming from the Civil War to the present situation. As August 3 looms and the debt ceiling stays at US$14.3 trillion, we'll see whether his doubts about Section Four dissipate.

Buckle your seat belts...

The news coming out of the US is not good for the US and not good for Mexico. The US economy is weaker than we'd thought: the revised GDP numbers show the recession was worse and that this year is weak. Revisions cut the first quarter 2011 growth rate from 1.9% to 0.4%. In the second quarter, the economy grew just 1.3%, less than half the average annual growth rate of the 60 years prior to the "Great Recession". Unlike Mexico, the US economy is still smaller than before the recession began in 2007.

Then, there's the debt ceiling. It's looking like the unthinkable could happen: lawmakers may well not agree to raise the debt ceiling before the August 3 deadline. Higher interest rates across the economy would be one result of failure to raise the debt ceiling. A financial market meltdown could be another. When business groups make common cause with the Obama Administration, it's obvious that failing to raise the debt ceiling is not what a weak economy needs.

Yet another trade surplus for Mexico...

For the sixth consecutive month, Mexico ran a surplus in its trade account. At US$107.9 million, June's surplus was the smallest of this year, but the fact that the trade account was in surplus while the economy is growing is striking. The 44.3% increase in oil revenues through June (compared to the first six months of 2010) was complemented by the 19.9% growth of non-oil exports.

In the first half of this year, the trade surplus totaled US$3.34 billion, 1,058.1% higher than in the first half of 2010. In the first half of 2009, the trade account was in deficit to the tune of US$1.84 billion. However, if oil is excluded from the calculation, the trade account showed a US$3.69 billion deficit through June; that was 21.0% less than in the first six months of 2010.

The average Mexican household

was composed of 3.9 people in 2010. Average annual household income was US$11,065 in 2010, down from US$12,613 in 2008. Households spent, on average, US$9,691 in 2010,  down from US$10,075 in 2008.

It's not over till it's over...

The European financial crisis is entering a new phase. Even though the Greeks managed to squeak through the latest iteration of their financial woes, the pressure is mounting. Last week, Moody's downgraded Portugal's debt to junk bond status. Last Friday, Italy came under attack...

Will the Fed put an end to monetary stimulus this year and what does it mean for Mexico?

The Mexican government doesn't think so, if the wording in the statement issued on June 23 by the Council on Financial Stability (CESF, comprised of Hacienda, Banco de Mexico, the CNBV, the Insurance Commission, the Consar and the IPAB -- in short, the financial regulators) is any guide. The CESF does not expect the Fed to "retire the monetary stimulus before the beginning of 2012".

The consequences are interesting: "therefore, the risk that capital flows to emerging markets will revert when US monetary policy is normalized has diminished. Nonetheless, risk persists due to the financing needs or renewed volatility caused by the fiscal problems of developed countries." In other words, we're not out of the woods yet.

Greece, again...

The 110 billion Euro rescue package the Europeans and IMF put together a year ago to keep Greece from defaulting wasn't enough to do the trick. To avoid default this summer,  the Greeks need another bailout package of about the same size. Before that, however, Greece must receive the next disbursement (12 billion Euros) of last summer's package to meet the payments falling due in mid-July.


This time around, there are some differences in how the bailout package will be structured. One is that governments' negotiators have agreed that the private sector must participate “in the form of informal and voluntary rollovers of existing Greek debt”. Germany's Merkel had pushed for debt swaps but settled for rollovers, a solution of which the European Central Bank approves. 


Another important difference is that the IMF is insisting that the European Union fill the gap if the Greek government's financing plan falls short of its goals. Needless to say, stepping up to the plate for Greece is not popular with European governments. How large the shortfall could be depends on the efforts of the Greeks, including the success of their privatization program which is budgeted to raise 50 billion Euros. There's also the uncertainty about the size of the private sector's "voluntary" contribution. 

Brady Bonds, version 2011?

Standard and Poors downgraded Greece's already far from sterling BBB credit rating three notches yesterday. Call it what you will -- re-profiling, restructuring, a haircut, default -- the odds that it will happen are rising.

Although bankers and many government officials argue that re-structuring Greece's debt would be the European equivalent of the Lehman Brothers' default, remember that the same arguments were made back in the 1980's when the Latin American debt crisis flourished. By the end of that decade, Brady Bonds were commonplace, a secondary market in trading the re-structured Latin American debt obligations had been born, and banks absorbed the write-offs the debt forgiveness entailed without sending the financial system into a tailspin.  

Direct foreign investment

Direct foreign investment (DFI) is not exactly flooding into Mexico. DFI totaled US$4.79 billion in the first quarter -- 8.0% less than a year earlier and less than half the portfolio investment registered in the first quarter of this year.

Reinvested profits accounted for two-thirds of DFI in the first three months of 2011. New investments accounted for over a quarter (28.1%) of DFI. Just 4.8% took the form of an increase in subsidiaries’ debt with parent companies.


Reflecting the acquisition of FEMSA, the Netherlands displaced the US as the leading source of DFI, providing nearly half (48.8%) of the total in 2010. In Q1, the US reasserted its typically dominant position: the US share came to 85.2% of the total. Switzerland followed, with 7.7%. Spain, Canada, and “the rest” contributed 2.3%, 2.4% and 2.4%, respectively. 


Over half (54.4%) of DFI went into manufacturing. Commerce attracted 18.1% and mining, 12.0%. Professional services and real estates garnered 7.1% and 6.3%, respectively, of the total, with “the rest” accounting for 2.4%.

Portfolio investment continues to pour into Mexico

Last year, portfolio investment set an all time record of US$23.77 billion. That was more than in the previous five years combined and only US$5.96 billion less than in all of the previous decade. 

In the first quarter of this year, portfolio investment totaled US$9.36 billion, double the total of the first quarter of 2010. Foreigners reduced their net holdings of Mexican equities by US$1.19 billion in the first three months of this year. However, they increased their net investments in money market obligations US$10.54 billion. To put that figure in perspective, it more than doubled the amount of DFI in the first quarter.

"A rose by any other name..."

As the reality that Greece has more debt than it can possibly service dawns, several euphemisms for restructuring have appeared. They're much less brutal than "taking a haircut". My favorite is "re-profiling".

A resurgence of the Greek drama?

Concern is rising in the international financial markets that the next iteration of the Greek rescue package may not be so much to creditors' liking as the first. Germany has opened up the possibility that bondholders should share the consequences of bad loans -- effectively, restructure the debt. It is not alone. The European central bank (ECB) advocates extending last year's loan program but in larger amounts. The IMF has played a mediating role between the two positions.

How effectively the IMF will play that role in the future is in question, following the arrest of the IMF's head, Dominique Strauss Kahn on sexual assault charges in New York. Has the  IMF's success in playing the role of mediator hinged more on Mr. Strauss Kahn's impressive political skills or on the gravitas of the institution he headed?

Wouldn't it be ironic if a single man's hormones changed the course of the Greek tragedy and the evolution of the international financial system over the short-term?

It's Carlos Slim Day...

Both the Wall Street Journal and the New York Times are featuring stories on the challenges to Carlos Slim's dominance posed by his battle with the Televisa/Azteca duopoly, the Supreme Court ruling and the mega-fine levied by the Federal Competition Commission. Until now, Telmex and Telcel have been able to postpone paying any fines levied until the judicial process has run its course. Effectively, that meant fines had no teeth. The drop in the share price following the ruling leaves no doubt that investors appreciate its significance, especially with the nearly US$1 billion fine imposed by the Federal Competition Commission in April outstanding.

The third week of next month, our 2011 ECONOMEX SPECIAL SESSION will give you the answers to the question of what is behind the pitched battle between Mexico's telecommunications and television giants. Jorge Alvarez Hoth, one of the architects of and leading authority on Mexico's telecommunications sector, will give us a roadmap of the conflict and discuss what the different possible outcomes could mean for your firm and for consumers. Mr. Alvarez Hoth is a former UnderSecretary of Communications, a top executive in a leading telecomm company, and a newly elected member of the Cofetel Advisory Board.

Economex subscribers will be receiving a mail with the date, place and time of the Special Session shortly. Others who are interested in this timely, controversial subject that impacts all of the economy and business will find more information on the American Chamber / Mexico webpage.

Inflation

Agricultural prices contracted in each of the first three months of 2011. When they rose in the first half of April, energy prices stepped up to fill the role of the factor suppressing inflation. After posting a cumulative increase of 2.27% in the first quarter, energy prices contracted 3.48% in the first 15 days of April, which resulted in deflation of 0.09% in the first half of this month.

Would you have believed that tax rates have fallen in the US?

A fascinating graph on the evolution of the tax rates paid in the US in the last half century...

Source:http://economix.blogs.nytimes.com/2010/04/13/taxing-the-rich-over-time/

An updated version of the DENUE is out...

Check the following link to access Denue 2.0, the Directorio Estadistico Nacional de Unidades Economicas.

http://www.inegi.org.mx/Sistemas/denue/Default.aspx

US home sales

At the peak of the US housing boom in 2005, new home sales constituted 15.3% of total home sales. In 2010, new home sales were 5.4% of a market that was 34.1% smaller than in 2005.

The US budget...

If you're interested in a quick, non-partisan rundown on the implications of Rep. Ryan's budget proposal, see the following link to the Director of the Congressional Budget Office's blog.

http://cboblog.cbo.gov/?p=2128

Risks to Mexico's banking sector

When the official body charged with assessing the stability of Mexico's financial system (Consejo de Estabilidad del Sistema Financiero) issued its first report yesterday, it gave Mexico's financial system a clean bill of health. The Council (CESF) is presided over by Hacienda and its members include Banco de Mexico, the CNBV (National Banking and Securities Commission), the CNSF (National Insurance and Bond Commission), the Consar (National Commission for Retirement Savings), and the IPAB (Institute for the Protection of Savings in Banks).

The CESF, the latest in the string of anacronyms overseeing the financial system, did observe that "an abrupt reversion of capital flows toward Mexico" could have have "unfavorable impact" but that it would be limited, thanks to actions taken by the government in recent years. The CESF also stated that "the Mexican economy has been capable of absorbing in an orderly manner the elevated capital inflows it has received recently and without generating distortions in the principal financial variables". The CESF goes on to assure us that "(T)he underlying conditions of the Mexican economy are solid and growth perspectives, favorable."

Finally, the CESF concludes that although "the indebtedness of states and municipalities does not presently represent an important problem for Mexico's financial system, it is necessary to generate adequate incentives to improve transparency and promote prudent fiscal policies by states and municipalities." Amen.

Maps, maps and more maps

A fascinating series of maps based on the results of the 2010 US census, from changes in vacant housing units to population and more...

http://projects.nytimes.com/census/2010/map?nl=todaysheadlines&emc=thab1

Who holds a passport in the US?

The following picture shows passport ownership by state in the US. It's worth bearing in mind when assessing declarations on US foreign policy made by governors, senators and representatives...
http://www.creativeclass.com/creative_class/_wordpress/wp-content/uploads/2011/03/passport1.jpg

Fallout is not limited to Japan

A UN forecast projects that the radioactive plume from Japan could reach southern California by late tomorrow, Friday. For more, see the following article from the New York Times.

http://www.nytimes.com/2011/03/17/science/17plume.html?nl=todaysheadlines&emc=tha22

Investment

The gross fixed investment (GFI) figures for December were published today, ten weeks after the year ended. GFI rose a less than impressive 2.3% last year. While GDP (in current pesos) might have recovered its 2008 by the final quarter of 2100, GFI certainly wasn't driving the recovery. Last year's meager gain only barely began to make inroads against 2009's 10.1% fall. 

GFI in machinery and equipment began to recover from its 21.0% plunge in 2009, rising 4.3% last year. Construction, the other main component of GFI, gained 1.2% in 2010, after falling 2.3% in 2009.

GFI in machinery and equipment is divided into imported and nationally-produced machinery and equipment. Nationally-produced machinery and equipment climbed 13.3% in 2010, its fastest growth rate in seven years; in 2009, it dropped 18.7%. Imported machinery and equipment inched up a mere 0.8% in 2010 after plummeting 22.0% in 2009. It will be interesting to see if this is a one-time effect or presages a switch in sourcing.

Interview with Ambassador Davidow

On Tuesday I gave a "Tequila Talk" at the Institute of the Americas. (Yes, they did serve tequila.) To see the interview, just click on the following link:

http://www.iamericas.org/en/ioa-videos/Tequila-Talk-with-Deborah-Riner/0/35/1

Monetary policy...

As expected, Banco de Mexico held the Mexican reference rate steady at 4.50% last Friday, the level at which it has stood since August of 2009. Although the one-month Cete rate popped up to 4.22% in the weekly primary auction six days ago, it remains well below the reference rate. It's worth bearing in mind that the level of average weekly demand has declined noticeably as the one-month rate has hovered closer to 4.0% than 4.5%.  

A rising tide lifts all ships...

The rising tide for the peso has been the massive inflows of foreign investment in Mexican peso-denominated money market instruments.  Nearly half of the last year's record US$23.13 billion in foreign investment in money market obligations flowed into the country in the last three months of 2010, spurred by Mexico’s inclusion in the World Global Bond Index (WGBI). To put that figure in perspective, it was almost four times the amount of DFI in Q4.

Portfolio investment last year set an all time record of US$23.77 billion. It was more than in the previous five years combined and only US$5.96 billion less than total portfolio investment in all of the previous decade.

Will the flood continue?

A trade SURPLUS in January

Thanks to oil, Mexico's export income exceeded its import bill by US$63 million in January.Without oil, the trade account would have been in DEFICIT to the tune of US$1.00 billion.

High oil prices are a big help, especially since the inexorable trend is for lower export volumes. In January, Mexico exported 1.444 million barrels a day, well above January 2010's 1.176 million level but a reduction from December's 1.501 million.

Just as the 40.6% year-over-year jump in oil export revenue drove the growth of exports (+28.2%), imported oil products were behind the 25.0% year-over-year rise in imports. Imported oil products climbed 41.0%; non-oil imports increased 22.8%. Fortunately for Mexico's trade and current accounts, imported oil products accounted for only 13.5% of the total import bill in January.   

Spending by the US Government...

For an excellent visual on how the US Governments spends the revenues it collects, check out the following link.


http://dotearth.blogs.nytimes.com/2011/02/22/a-long-deep-view-of-the-u-s-budget/?nl=opinion&emc=tyb2

When the budget debate centers on cutting the 12% of the government's spending that is discretional, one must ask, as in the famous advertisement, "where's the beef?"

Spending by the US Government...

For an excellent visual on how the US Governments spends the revenues it collects, check out the following link.


http://dotearth.blogs.nytimes.com/2011/02/22/a-long-deep-view-of-the-u-s-budget/?nl=opinion&emc=tyb2

When the budget debate centers on cutting the 12% of the government's spending that is discretional, one must ask, as in the famous advertisement, "where's the beef?"

The more things change...

The drama playing out in Ensenada not only undercuts the Supreme Court's approval of Integrated Service Contracts for Pemex, it also reawakens investors' concerns about the rule of law in Mexico.

On February 12, Ensenada's PRI mayor, Enrique Pelayo, sent police to close the Costa Azul gasification plant located 23 kilometers north of Ensenada, in which Sempra Energy invested US$1.2 billion. Now Sempra has put a US$3.5 billion investment in wind power on hold.

Never mind that federal authorities -- both the Environment Ministry and the Energy Regulatory Commission (CRE) -- say that the Costa Azul plant complies with the law. Furthermore, natural gas storage is the exclusive responsibility of the federal government, according to the CRE. Neither is Mayor Pelayo concerned with the electricity shortages in Baja, Tijuana, Ensenada, and Mexicali the Federal Electricity Commission (CFE) says closing the Costa Azul plant will provoke.

It's alleged that if Sempra pays US$16 -60 million, the legal problems the Mayor claims exist will go away.

Is this the message Mexico wants to send?   

GDP in 2010

Mexico’s GDP shot up 5.5% in 2010, measured on a year-over-year basis). Although GDP did not recover its pre-crisis high last year, it came much closer than expected. The Mexican economy should surpass its pre-crisis high by the middle of this year. GDP rose in each quarter of 2010. 

The US uses another methodology for measuring GDP growth rates. The US headline growth figure annualizes the change in GDP versus the previous quarter instead of measuring against the same quarter of the previous year. This methodology better captures changes in the economy’s direction. The year-over-year comparison better portrays how the economy looks compared to a year earlier. 


Mexico’s GDP climbed 5.1% in Q4 using the US reporting methodology. The primary division grew 4.6% while the secondary division grew 5.3%. The tertiary division rose 5.0%. 

Mexican export crude

The average annual price of a barrel of Mexican export crude actually surpassed the price of a barrel of West Texas Intermediate (WTI) several days, a very rare occurrence.  However, this decade has seen a trend in which the price of Mexican crude has come closer to the price of WTI, as the following table demonstrates.

Average	Mexican Export Crude Price as a Percentage of WTI Price
2003 - 2010	82.9%
2003 - 2006	77.5%
2007 – 2010	88.3%
2009 - 2010	91.7%

Tourism in Mexico, 2010

In 2010, incoming and outgoing tourism recovered. Incoming tourism revenues rose 8.5%. Outgoing tourism expenditures grew 2.1%. The US$4.6 billion tourism surplus was its second highest level ever. The high, US$4.8 billion, was in 2008.

Looking at the number of tourists rather than revenues and expenditures tells a different story. The 79.9 million tourists who visited Mexico in 2010 was the lowest number since 1989. 

Mexico: growing above trend in November

The growth cycle indicators published for November this morning show that both the coincident and forward indicators report the economy as growing above trend. The same was true of industrial production. 

Jobs in the US

A long way to go...

The graph is from Economix

http://economix.blogs.nytimes.com/2011/02/04/comparing-recoveries-job-changes-3/?nl=todaysheadlines&emc=tha2

Numbers on illegal immigrants in the US

The Pew Hispanic Center has published the 2010 numbers on illegal immigration in the US. Here are some of the salient findings:

-- 11.2 million illegal immigrants in 2010 vs. 11.1 million in 2009

-- Mexicans comprise 58% of the total (6.5 million)

--The number of illegal immigrants peaked in 2007 at 12.0 million

--In 2010, about 8 million illegal immigrants were working

-- Illegals were roughly 5% of the US workforce

--350,000 babies were born to families with at least 1 illegal parent

--That's 8% of all newborns in the US

--2/3 of the illegal parents of newborns had been in the US at least 5 years

--The number of newborns was basically unchanged from 2009

-- About 400,000 people were deported each year in 2009 and 2010

For more information, see the report at http://pewhispanic.org/

Exports and China...

"China exports more than $4 of goods to the United States for each $1 it imports from America, creating a trade surplus of about $275 billion.", according to an article in the January 31, 2011 New York Times.

To put the the size of China's trade surplus in perspective, that surplus is nearly the size of Mexico's total exports ($298 billion) in 2010. China's trade surplus exceeded the $257 billion Mexico earned from its manufactured exports.

Rising costs in China have already caused a slowdown in American orders, which has translated into "some container shipping lines to cancel up to a quarter of their trips to the United States this spring from Hong Kong and other Chinese ports... the annual pre-[Chinese] New Year rush has been nothing like that of recent years, causing shipping lines to reverse rate increases and cancel sailings they introduced last summer as the American economy improved."

This is an opportunity for Mexico as well as other Asian manufacturers.

http://www.nytimes.com/2011/01/31/business/global/31trade.html?pagewanted=2&nl=todaysheadlines&emc=tha25

The job story...

The Administration proudly announced that the number of workers registered with the Social Security Institute (IMSS) rose by 720,348 in 2010. That is its highest year-end level since 2003 and the greatest number of jobs created in a calendar year since 1999. The accomplishment is, indeed, one of which to be proud.

The unemployment data published by INEGI last Friday is on the "half empty" side of the famous glass. By any measure -- national, urban, seasonally adjusted or not -- the December 2010 unemployment rate was higher than than in December 2009. The seasonally adjusted urban unemployment rate, my preferred measure, stood at 6.73% last month, 49 basis points higher than in December 2009 and 40 basis points higher than in December 2008.

The two measures of unemployment (the IMSS and the INEGI numbers) can be compatible, if one assumes that the IMSS enforcement efforts have persuaded employers to register employees who should have been registered but weren't.

An excellent column

by Luis Rubio was published in Reforma, the Mexico City daily, yesterday, Sunday, January 23. You can find it on the editorial page.

For history buffs...

An fascinating article on Mexico's Matias Romero's meeting on January 18, 1861 in Springfield, Illinois with President-elect Abraham Lincoln...

http://opinionator.blogs.nytimes.com/2011/01/17/lincolns-mexican-visitor/?ref=opinion&nl=opinion&emc=tya5

Useful to remember that the Juarez Liberals who won Mexico's civil war thought the road to modernization was through integration with the country's northern neighbor.

Good news for Mexican growth, exports and employment...

On January 10, CNN Money argued that the December auto sales figures in the US could portend a good 2011:

"Most automakers ended a challenging 2010 with a strong sales month, raising hopes that the industry could be carrying some momentum into the new year.

American automakers General Motors, Ford Motor and Chrysler Group all posted solid gains that met or topped forecasts. Ford's gains in 2010 allowed it to recapture the position of No. 2 automaker in U.S. sales, trailing only GM, for the first time since 2006, reclaiming the spot from Toyota Motor."

Given that a quarter of all Mexican manufactured exports are auto-related (four-fifths of which go to the US market), growing vehicle sales in the US is very positive for Mexico.

ECONOMEX BLOGS

If you're interested in reading the Economex blog from previous years, you can find it at the following addresses:

http://economex2010.blogspot.com/

http://economex2009.blogspot.com/

http://economex2008.blogspot.com/

http://economex2007.blogspot.com/

OUT WITH THE OLD YEAR AND IN WITH THE NEW

The financial markets saw 2010 go out on and rang in 2011 on a positive note. Mexican equities once again outperformed the three major US indices. The IPC climbed 27.0%, measured in dollars, in 2010. The Nasdaq, the strongest of the three US indices, gained 16.9%. The Dow rose 11.0% last year while the S&P 500 appreciated 12.8%.

Mexican equities have dramatically outperformed US stocks this decade. Between the final day of 1999 and the last day of 2010, the Bolsa index soared 315.9% in dollars. The Dow did the best of the US indices: it inched up 0.7%. The S&P 500 and Nasdaq lagged considerably, losing 9.4% and 34.8%, respectively.

The IPC’s spectacular gains over the last eleven years may be reason to suppose that it is due for a period of underperformance. The dominant market position of many of the firms that comprise the IPC are reason to think otherwise.

Unless the Europeans fail to preserve the Euro or the Mexican government abandons its decades’ long commitment to macro stability, investors in Mexico should prosper.