As the G20 Summit developed, mexican authorities announced the agreement on a 47 thousand million dollars as a Flexible Credit Line (FCL) from the IMF. This is the first time the found offers financial help to Mexico and not the other way around. It is important to acknowledge that Mexico has a good record in macroeconomic achievements, at least for the last 15 years, and this credit line should be seen as a prize rather than a negative sign.
As it is defined contingent it will only be used in case of need, furthermore, it is available in a time when internacional financial flows are drying, not only for Mexico but for all emerging markets as the rich economies are deleveraging. The agreement looks like pure gold in moment of historic financial stress.
Still, there are many voices, mostly from left-wing politicians, arguing that this credit line is more public debt, or worse, that this violates the constitutional arrangement that Congress must aprove the level of indebtness every year. Both are political fallacies.
First, this FCL would not be public debt as it is not a security Mexican government must honor with future tax revenues. The credit would be paid only with international reserves generated by exports or direct foreign investment.
Second this credit would not be honored with future tax revenues. If this were to be the case, government would buy dollars from the central bank in order to re-pay the credit. This is a contradiction since the credit is already in the obligations side of the central bank's balance sheet.
Understandingly Mexican politicians are averse to sign any contract with the IMF provided such horror stories as Argentina's following found's guidelines. Let us not forget that argentinians failed in two basics of modern macroeconomics -controlled budget deficits and flexible exchange rate- anyway, even if the found drove Argentina to it's last crisis, the credit line has no conditions of use at all.
Assume Mexican central bank were to use the credit this would reveal that the demand for dollars is bigger than some international reserve level decided by the central banker. Thus, borrowed dollars will be bought in exchange of Mexican pesos, reducing money supply. Now how will the bank pay those dollars? With a healthier economy, foreign direct investment should increase causing a rise on international reserves. Oil sales should also provide a source of dollars. A natural question is: what happens if the latter two mechanisms do not work?
In this polar scenario Mexican government should have to issue dollar debt to be paid with future tax revenues. How can the last posibility be ruled out? Simply put, it can not be dismissed. Is true though that is far less likely to occur.
The right approach to the credit of the example can be reduced to a simple one: Mexico is bringing "future international reserves" to present. It is also true that the credit line will disuade present speculation from Mexican currency.
It may be possible that the credit turn in to public debt, however it is far less likely and advantages outweight risks from using it -if needed.
As it is defined contingent it will only be used in case of need, furthermore, it is available in a time when internacional financial flows are drying, not only for Mexico but for all emerging markets as the rich economies are deleveraging. The agreement looks like pure gold in moment of historic financial stress.
Still, there are many voices, mostly from left-wing politicians, arguing that this credit line is more public debt, or worse, that this violates the constitutional arrangement that Congress must aprove the level of indebtness every year. Both are political fallacies.
First, this FCL would not be public debt as it is not a security Mexican government must honor with future tax revenues. The credit would be paid only with international reserves generated by exports or direct foreign investment.
Second this credit would not be honored with future tax revenues. If this were to be the case, government would buy dollars from the central bank in order to re-pay the credit. This is a contradiction since the credit is already in the obligations side of the central bank's balance sheet.
Understandingly Mexican politicians are averse to sign any contract with the IMF provided such horror stories as Argentina's following found's guidelines. Let us not forget that argentinians failed in two basics of modern macroeconomics -controlled budget deficits and flexible exchange rate- anyway, even if the found drove Argentina to it's last crisis, the credit line has no conditions of use at all.
Assume Mexican central bank were to use the credit this would reveal that the demand for dollars is bigger than some international reserve level decided by the central banker. Thus, borrowed dollars will be bought in exchange of Mexican pesos, reducing money supply. Now how will the bank pay those dollars? With a healthier economy, foreign direct investment should increase causing a rise on international reserves. Oil sales should also provide a source of dollars. A natural question is: what happens if the latter two mechanisms do not work?
In this polar scenario Mexican government should have to issue dollar debt to be paid with future tax revenues. How can the last posibility be ruled out? Simply put, it can not be dismissed. Is true though that is far less likely to occur.
The right approach to the credit of the example can be reduced to a simple one: Mexico is bringing "future international reserves" to present. It is also true that the credit line will disuade present speculation from Mexican currency.
It may be possible that the credit turn in to public debt, however it is far less likely and advantages outweight risks from using it -if needed.
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