Latin Finance - November/December 2011 - 37

sub-sovereign debt

them a free rein over spending. “It makes our debt tracking efforts difficult,” Garza adds. “Short-term debt can change month to month so the yearend results may not show exactly what the state has or what it is has used it for.” It’s no wonder Coahuila was able to accumulate such a large sum of short-term credit, which it was forced to refinance following the underreporting scandal. In the end, creditors accepted a 20-year payout from Coahuila based on federal transfers and payroll taxes owed to the state. The new 20-year loan comes with a two-year grace period and pays a spread of TIIE plus 275 basis points, according to a person familiar with the negotiation. Other states are also moving to raise funds to cover short-term debt, On September 9, Chihuahua raised some 3 billion pesos through a local bond to make up for more than half of its 5 billion peso reporting discrepancy. It will, however, need to pay the remaining 2 billion pesos by year end, analysts say. Additionally, Chiapas is scheduled to pay some of its short-term debt by the end of 2011 while Tabasco has 12 months to satisfy an unspecified chunk of its shortterm obligations. But it’s not just short-term loans that are causing concern. State’s long-term liabilities have been swelling, according to Carillo. Coahuila, Michoacan, Nayarit, Veracruz and Quintana Roo together now have some 84 billion pesos in long-term debt. While none of these states have defaulted on their payments, risks are rising. “Some of them have up to 30 years to pay this debt so there’s no immediate default risk,” says Carillo. “Still, I don’t see them putting a break on their spending and their tendency to take on more debt continues.” The states carry a mix of short and long-term loans as well as bonds. The federal government has said it won’t bail them out but will offer guarantees to help them refinance their liabilities at better rates and conditions should they find themselves in financial hardship. Yet while sub-sovereigns did a poor job at managing their finances, some are now simply looking to restructure shorter more expensive debt taken out during

the height of the last financial crisis, says Ezequiel Gonzalez Ruiz, government debt director at Scotiabank, “In 2008, it was hard to finance on 30-year terms so many borrowings were done on 10-year terms and interest rates of 200 basis points over TIIE,” Gonzalez notes. “Now terms are back to 15-20 years and rates can be gotten at 100 basis points or some times even less.” He adds the states are likely to refinance as much debt as possible in the next 6-12 months out of fear that the US and global economy could worsen.

Government Action 

Aware of the growing sub-national debt problem, the government is working on three key measures to reduce it. The first involves forcing banks to declare how much short-term debt they hold from each state. This measure is expected to come into effect by year-end. “The states are allowed to regulate their own loans so the federal government can’t do much to force more disclosure,” says one credit analyst. “However, by obligating the banks to report these credits, they will have a better idea of who owes what.” As of early October, lenders are required to taken on more thorough credit analysis before granting loans to states or municipalities. In the past, banks simply used the state’s credit rating to approve a loan, Carillo says. Congress is now reviewing the third and perhaps most important measure, which is to limit how much short-term debt states can raise and force these borrowers to disclose this activity to the federal government. Analysts hope this will be approved before the government changes hands in November 2012. “We don’t know what will happen yet but the worry is there at the federal level and on legislator’s minds,” says one analyst. “But for sure, the government cannot let this situation continue to go on. We don’t want a situation like Argentina where soaring public debt levels helped trigger a sovereign debt default in 2002.”

No Threat to Sovereign 

Mexico is clearly far from such a situation

and while worrying, the rise in subnational debt is yet to pose a threat to Mexico’s ratings or its broader financial health. “The sovereign rate is stable and not at risk because of the sub-national debt issue,” Carrillo says. Garza concurs, adding that the state’s rising short-term liabilities are not high enough to trigger a Moody’s downgrade. Debt metrics are comparatively healthy. The majority of the states’ debt is in long-term loans and Mexican sub-national liabilities are significantly lower than other parts of Latin America. As of the end of 2010, Mexican states’ median debt-to-revenue ratios stood at somewhere between 15% and 20% for municipalities. Furthermore, 90% of Mexico’s sub-national debt is safer long-term loans, though in some states short-term debt can account for 50%, Garza reveals. That said, debt ratios vary from state to state, and some are clearly facing more difficult scenarios than others. Of Mexico’s 25 states, the Federal District (home to the capital Mexico City) has the highest debt-to-revenue ratio at 44%, followed by Nuevo Leon with 42%, according to Moody’s. The states with the highest short-term loan debt-to-revenue ratio are Nuevo Leon and Quintana Roo with 13% and 39% respectively. While these ratios are not exactly alarming, Mexican states have very little financial flexibility in how they can pay their obligations as federal revenues are already slated for specific purposes. “The states get 90% of their money from the federal government,” Garza explains. “More than half of it is earmarked for capital expenditures or growth projects so this gives them little room to service liabilities.” The situation is different in other Latin American countries where regions or states are often allowed to use up to 50% of federal revenues to repay loans, he adds. “The problem in Mexico is not so much the debt amount but the low financial flexibility states have to pay and their lack of transparency and poor management practices which makes creditors insecure about their willingness to pay,” Garza adds. LF
LatinFinance 37

November/December 2011



Latin Finance - November/December 2011

Table of Contents for the Digital Edition of Latin Finance - November/December 2011

Latin Finance - November/December 2011
Contents
Contagion Risk
Mexican Credit
China Investment
Loan Markets
Mexico Banks
Sub-Sovereign Debt
Banks of the Year 2011
Argentina Investor Report
Reversal of Fortunes
Latin Finance - November/December 2011 - Latin Finance - November/December 2011
Latin Finance - November/December 2011 - Cover2
Latin Finance - November/December 2011 - Contents
Latin Finance - November/December 2011 - 2
Latin Finance - November/December 2011 - 3
Latin Finance - November/December 2011 - 4
Latin Finance - November/December 2011 - 5
Latin Finance - November/December 2011 - 6
Latin Finance - November/December 2011 - 7
Latin Finance - November/December 2011 - 8
Latin Finance - November/December 2011 - 9
Latin Finance - November/December 2011 - 10
Latin Finance - November/December 2011 - 11
Latin Finance - November/December 2011 - Contagion Risk
Latin Finance - November/December 2011 - 13
Latin Finance - November/December 2011 - 14
Latin Finance - November/December 2011 - 15
Latin Finance - November/December 2011 - 16
Latin Finance - November/December 2011 - 17
Latin Finance - November/December 2011 - 18
Latin Finance - November/December 2011 - 19
Latin Finance - November/December 2011 - 20
Latin Finance - November/December 2011 - 21
Latin Finance - November/December 2011 - Mexican Credit
Latin Finance - November/December 2011 - 23
Latin Finance - November/December 2011 - 24
Latin Finance - November/December 2011 - 25
Latin Finance - November/December 2011 - China Investment
Latin Finance - November/December 2011 - 27
Latin Finance - November/December 2011 - 28
Latin Finance - November/December 2011 - 29
Latin Finance - November/December 2011 - Loan Markets
Latin Finance - November/December 2011 - 31
Latin Finance - November/December 2011 - 32
Latin Finance - November/December 2011 - 33
Latin Finance - November/December 2011 - Mexico Banks
Latin Finance - November/December 2011 - 35
Latin Finance - November/December 2011 - Sub-Sovereign Debt
Latin Finance - November/December 2011 - 37
Latin Finance - November/December 2011 - Banks of the Year 2011
Latin Finance - November/December 2011 - 39
Latin Finance - November/December 2011 - 40
Latin Finance - November/December 2011 - 41
Latin Finance - November/December 2011 - 42
Latin Finance - November/December 2011 - 43
Latin Finance - November/December 2011 - 44
Latin Finance - November/December 2011 - 45
Latin Finance - November/December 2011 - 46
Latin Finance - November/December 2011 - 47
Latin Finance - November/December 2011 - 48
Latin Finance - November/December 2011 - 49
Latin Finance - November/December 2011 - 50
Latin Finance - November/December 2011 - 51
Latin Finance - November/December 2011 - 52
Latin Finance - November/December 2011 - 53
Latin Finance - November/December 2011 - 54
Latin Finance - November/December 2011 - 55
Latin Finance - November/December 2011 - 56
Latin Finance - November/December 2011 - 57
Latin Finance - November/December 2011 - 58
Latin Finance - November/December 2011 - 59
Latin Finance - November/December 2011 - 60
Latin Finance - November/December 2011 - Argentina Investor Report
Latin Finance - November/December 2011 - 62
Latin Finance - November/December 2011 - 63
Latin Finance - November/December 2011 - Reversal of Fortunes
Latin Finance - November/December 2011 - Cover3
Latin Finance - November/December 2011 - Cover4
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