Bloomberg News

Never-Used $72 Billion IMF Loan Wins Over Traders

November 07, 2012

Central Bank Governor Agustin Carstens

Central bank Governor Agustin Carstens said at an event in Mexico City on Nov. 1 it’s “very probable” the nation will renew the credit line, set to expire in January, before President Felipe Calderon leaves office on Dec. 1. Photographer: Tomohiro Ohsumi/Bloomberg

Mexico’s push to renew a $72 billion International Monetary Fund loan that it’s never used is showing why the country is safer than Brazil to bond traders.

Protecting Mexican dollar bonds against default for five years using swaps cost 0.98 percent annually as of yesterday. That’s 183 basis points, or 1.83 percentage points, less than when the country obtained the no-interest credit line in April 2009 and four basis points cheaper than credit-default swaps for Brazilian notes. In the past two years, Mexican debt has been an average three basis points more expensive to insure.

While a record $162 billion of reserves and an economy that’s growing at double the pace of the U.S. and Brazil suggest that Mexico doesn’t need support from the IMF, UBS AG says the government is pursuing the credit line to avoid repeating the economic slowdown and 20 percent peso plunge sparked by the financial crisis in 2008. The perceived default risk of Mexico, which shunned capital controls that Brazil has adopted, is now lower than some nations with higher credit ratings, including Israel and Slovakia.

The IMF loan “has helped to build that view of macroeconomic stability,” Rafael de la Fuente, an economist at UBS, said in a telephone interview from Stamford, Connecticut. Brazil “suffers in the eyes of investors from too much discretion as opposed to a rule-based investment regime, which the Mexicans have been very good at implementing.”

IMF Seal

Central bank Governor Agustin Carstens said at an event in Mexico City on Nov. 1 it’s “very probable” the nation will renew the credit line, set to expire in January, before President Felipe Calderon leaves office on Dec. 1. Luis Videgaray, the co-head of President-elect Enrique Pena Nieto’s transition team, told reporters on Oct. 30 that he’d support renewing the facility.

Carstens said in an interview in Mexico City on Nov. 4 that while the financial resources are “important” for Mexico, the loan represents the “seal of quality” from the IMF.

At a press conference following the conclusion of Group of 20 meetings in Mexico City on Nov. 5, IMF Managing Director Christine Lagarde said the fund is in “active and constructive discussions with the Mexican authorities to make sure that there is a smooth transition going forward.”

Lower Ratings

Credit-default swaps on Mexican debt fell from the day before. 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.

At 98 basis points as of yesterday, it costs about $98,000 annually to secure $10 million of Mexican debt, versus $145,000 for Israel and $112,000 for Slovakia.

Mexico is rated BBB by Standard & Poor’s and Fitch Ratings, at least three levels below Israel and Slovakia.

The IMF in April projected Mexico’s government debt will equal 43 percent of gross domestic product this year, versus 107 percent for the U.S., 79 percent in Germany, 90 percent for the euro area and 78 percent overall for the Group of 20 nations. Mexico’s economy will expand 3.8 percent this year, versus 1.5 percent in Brazil and 2.1 percent in the U.S., based on the median forecasts of economists surveyed by Bloomberg.

“Mexico’s tightening CDS levels are entirely justified and the country will probably continue to be an outperforming credit,” Nick Chamie, the head of global foreign-exchange strategy at Royal Bank of Canada in Toronto, said by telephone. “Mexico has amongst the very best fiscal balances and government debt metrics of any major economy in the world.”

Brazil Controls

Mexico originally obtained a $47 billion credit line, then the largest financial arrangement in the IMF’s history, in 2009 and boosted it to $72 billion in January 2011. Colombia and Poland are the only other nations with similar IMF agreements, which can be obtained for as many as two years with no conditions by qualifying nations.

The renewal forms part of Mexico’s push to lure investors and secure the lowest borrowing costs possible, a tack that contrasts with policies in Brazil, where the government has erected barriers to its fixed-income markets to push down the value of its currency.

While Mexico has doubled its international reserves in the past three years, Brazil’s are more than twice as large at $377.5 billion.

‘Less Relevant’

Siobhan Morden, the head of Latin American fixed income at Jefferies Group Inc., says the IMF loan is less relevant today because Mexico isn’t as vulnerable to a spillover or worsening of the European debt crisis as it was to the region’s contraction and the recession in the U.S., the country’s biggest trading partner, three years ago.

“Back then, this facility was extremely important for Mexico in restoring some confidence in the peso and reducing the financial asset volatility,” Morden said in a telephone interview from New York. “It’s useful to have, but I don’t know that it’s going to have any impact on credit spreads.”

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries rose three basis points to 159 basis points at 7:53 a.m. in Mexico City, according to JPMorgan Chase & Co.

The peso slid 0.3 percent to 12.9963 per dollar. Yields on Mexican interbank rate futures contracts due in December, known as TIIE, fell three basis points yesterday to 4.87 percent.

Mexico is making the right decision in renewing the flexible credit line, or FCL, because it shows investors the nation is acting responsibly, UBS’s de la Fuente said.

“Even today, the FCL is an efficient way of augmenting reserves,” he said. “It’s a good option to have.”

To contact the reporters on this story: Eric Martin in Mexico City at emartin21@bloomberg.net; Ben Bain in Mexico City at bbain2@bloomberg.net

To contact the editors responsible for this story: Michael Tsang at mtsang1@bloomberg.net; David Papadopoulos at papadopoulos@bloomberg.net


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