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Cause for Concern

Nov 1, 2011

Underreported debt loads by Mexican state governments has alarm bells ringing. The federal government and banks are moving to contain the damage.

by Ivan Castaño
Mexico's short and long-term sub-national debt levels have skyrocketed since the 2009 global recession, triggering several rating downgrades and forcing the federal government to act before the situation deteriorates further.

In comparative terms, Mexican state debt levels may not be that high. But the lack of transparency about local government books and banks' exposure to such entities is a cause for concern at a time when sub-sovereigns are spending more despite limited flexibility in how they can meet their obligations.

Tax authorities' recent discovery that several regions have underreported short-term liabilities served as a wake-up call and encouraged both banks and government officials to respond after several high profile restructurings, most notably the State of Cohahuila.

Banks' increased exposure to municipalities and states has left some analysts wondering whether this has the potential to become a more widespread problem, both for banks and the government.

Mexican...

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