Carstens warns on US debt threat to Latin America
LatAm economies face serious consequences if the US fails to resolve its debt ceiling issue, Mexico’s Central Bank head says
Latin America's slowing economies could face "very
severe" repercussions if US lawmakers fail to raise the
government's debt ceiling, Mexico's Central Bank Governor
Agustin Carstens warned in an interview with
"If there is a major breakdown [in US debt ceiling
talks] and this is a prolonged issue, the consequences could be
very serious," Carstens said.
His comments came as congressional leaders in
Washington failed this weekend to break an impasse to avoid a
possible sovereign default when its borrowing cap expires on
Carstens said that Mexico's economy - which has
disappointed following a sharp slowdown in growth this year -
could face severe headwinds if a deal is reached in Washington
that chokes off US growth as a result of sharp spending cuts.
In the case of a default, "the shock would be very strong," he
"The main point is how the US government reacts," he
said. "If they decide to cut government spending, they could go
into recession. If there is a default then the financial sector
and capital account would be the transmission mechanism [to the
His comments were echoed by Mexico's public credit
director Alejandro Díaz de León, who told
LatinFinance the threat of a US default was "like
having an explosive device that could be deactivated if both
parties agree." He added that while he expected a default to be
avoided, uncertainty over US economic policy meant that
"volatility will be with us for quite some time."
Carstens said that Mexico's economy - which faltered
this year amid weak US demand for exports and a slump in
construction - was nevertheless poised for a
If US leaders strike a longer-term budget deal and
avoid breaching the debt ceiling, Carstens said a pickup in US
growth to at least 2.5% would "give an additional push" to
Carstens expects GDP to expand by up to 2.0% in 2013,
compared to 3.8% last year.
Following Mexico's sharp economic contraction in the
second quarter and devastating floods last month, growth
forecasts have been slashed. The
IMF last week cut its 2013 growth forecast to 1.2%, from its
July estimate of 2.7%.
Carstens refused to be drawn on whether the central
bank would reduce interest rates further to boost
think we are entering into a phase where the economy can start
to grow faster," he said.
He added that the slowdown was due to an "unintended
major fiscal contraction" that was partly the result of a
lengthy transition period following last July's election until
the government took office in December.
Currency depreciation, following a sharp surge in the
peso at the beginning of the year, would also "support the growth in
exports" he said.
Analysts expect further cuts by year-end of between 25
basis points and 50 basis points to the main policy rate, now
at 3.75%. LF