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?