Mexico goes hat in hand to the IMF

This comes from Win Thin, a senior currency strategist at Brown Brothers Harriman:

Mexico President Calderon is now saying that Mexico stands ready to take a $30-40 bln IMF credit line. This was a surprise to us, and we view this as a negative for Mexico since no country until now has gone to the IMF for any sort of precautionary program due the stigma that’s still attached to such a move. There have been no further details, but we assume that Mexico is talking about the Short-Term Liquidity Facility (SLF). This was established back in Oct as a quick disbursement mechanism for countries with strong economic policies that are facing temporary liquidity problems in the global capital markets. While there has been a surge in traditional IMF programs in recent months, there has been zero demand for the SLF so far. We also note that after the Asian crisis, then-Managing Director Michel Camdessus set up the “Contingent Credit Line” that was intended to be precautionary credit for “good” members. The program was introduced in 1999 and expired in March 2003 after no borrowers came forward.

We do note that Mexico really isn’t that vulnerable compared to Eastern Europe. External debt/GDP is around 20%, while short-term debt/reserves ratio is about 42% and the current account gap this year is expected at around 3% of GDP. However, there are concerns that the corporate sector is facing a large-scale currency mismatch, which would help explain the potential IMF deal. Central bank Governor Ortiz said recently that Mexico may activate its USD swap line with the Fed soon. Still, it’s a bit surprising to hear about a possible IMF program even as the peso is having its best month since the Tequila crisis of the 1990s. In our view, though, investor confidence is likely to take a hit from Calderon’s remarks. USD/MXN tested the 14 level but failed to break it today, and so we look for a bounce higher for the buck after this news. USD/MXN earlier this week broke the 38% retracement level of the Mar drop at 14.434, which targets the 50% level at 14.6532 and the 62% at 14.8725.