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.