VZCZCXRO4956
PP RUEHCD RUEHGD RUEHHO RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHMC #0548/01 3471541
ZNR UUUUU ZZH
P 121541Z DEC 08
FM AMCONSUL MONTERREY
TO RUEHC/SECSTATE WASHDC PRIORITY 3357
INFO RUEHME/AMEMBASSY MEXICO PRIORITY 4383
RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHMC/AMCONSUL MONTERREY 8882

UNCLAS SECTION 01 OF 02 MONTERREY 000548 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EIND EINV ETRD PGOV MX
SUBJECT: MEXICAN CREDIT CRUNCH AFFECTING INTEREST RATES, CREDIT 
AVAILABILITY AND SMES 
 
REF: A) MEXICO 3345 B) MONTERREY 508 
 
MONTERREY 00000548  001.2 OF 002 
 
 
¶1.      (SBU)  Summary.  Although the Mexican financial system 
remains well capitalized, credit has become more expensive and 
more difficult to obtain for certain sectors such as for car 
purchases and small and medium sized enterprises.  Our contacts 
all agree that the Mexican financial system will not suffer a 
crisis on the scale of the 1994 `tequila crisis', but most think 
that banks are reevaluating credit lines and restricting credit 
access.  On balance, we expect that credit will continue to 
tighten as the impact of the U.S. recession and financial woes 
affect the real economy in Northern Mexico.  End Summary. 
 
 
 
Mexican Financial System Remains Well Capitalized 
 
 
 
¶2.      (SBU)  Our contacts agree that the Mexican financial 
system entered into the global crisis in good shape.  Jorge 
Vasquez of Harbor Consultants pointed out that the latest 
statistics show that Mexican banks are well capitalized, with 
15% reserves, above the US banks 10-13%, and well above 
international requirements (see reftel A).  Domestic banks 
pulled back after the 1994 crisis, and their vanilla mortgage 
products and lack of financial penetration in the market have 
protected them in this downturn.  Mexican banks did not make 
exotic home mortgage loans, and the level of Mexican consumer 
credit cards is only 6%, compared to 80% in the U.S.   However, 
Mexican banks are over 80% foreign owned, thus connecting them 
to world financial markets.  Our interlocutors pointed out that 
unlike prior crises, which grew from poor Mexican macroeconomic 
policies, this crisis is imported from abroad.  All of our 
contacts agreed that the current crisis will not resemble the 
1994 catastrophic crisis, which sharply restricted credit 
availability and painfully reduced living standards. 
 
 
 
¶3.      (SBU)  Despite the financial systems overall strength, 
global financial conditions have increased the cost of credit 
and tightened its supply in Mexico.  As noted earlier, since 
over 80% of domestic banking assets are controlled by foreign 
banks, the Mexican subsidiaries have had to withdraw capital 
from Mexico to cover losses at home.  In addition, local 
business consultant Robert Chandler pointed out three other 
factors reducing the supply of credit in Mexico.  Although 
Mexican banks did not engage in the same excesses as in the 
U.S., they still have aggressively extended credit for cars and 
consumer purchases, and the delinquency rates of these loans 
have climbed sharply.  Mexico does not have any usury laws, so 
consumer credits cards can have effective rates, including fees, 
commissions and late charges, of 100%, so if a consumer falls 
behind they can never catch up with their payments.  In 
addition, banks aggressively marketed their consumer credit 
cards, but there was no effective way to measure the consumers' 
overall indebtedness, so a marginal credit applicant could 
obtain multiple credit cards.  In addition, Mexico's managed 
pension funds, called AFORES, have suffered losses since April 
2008, mirroring the stock market, further reducing the Mexican 
stock of capital.  Finally, according to Chandler, foreign 
investors are pulling money out of Mexico.  Although Mexico 
still has an attractive yield interest rate spread compared to 
the United States, foreign investors have made their `flight to 
quality' to dollar denominated investments.  In addition, 
despite the investment spread, foreign investors have been 
burned by the market devaluation of the Mexican peso, which has 
fallen significantly against the dollar, thus reducing the value 
of their investments.  Nevertheless, several financial 
consultants told us that Mexican investors were maintaining 
their investments in pesos, and were not fleeing to the safety 
of dollars as they had in prior crises. 
 
 
 
Consequences of the Credit Crunch 
 
 
 
¶4.      (U) All observers agree that Mexican credit has become 
more expensive and loan delinquency rates have increased. 
Vasquez noted that mortgage interest rates have climbed 2-3%, 
and consumer credit cards interest rates had risen 8%.  Credit 
delinquency is also up.  According to press reports, October 
loan delinquency rates have risen to 8.1% for credit cards, 3.4% 
for mortgages and 1.56% for business loans.  Another report 
claims that 9.9% of consumers are behind in their credit card 
payments. 
 
MONTERREY 00000548  002.2 OF 002 
 
 
 
 
 
¶5.      (SBU)  Most of our contacts think that credit access has 
become more restricted.  Chandler commented that new business 
projects are nearly suspended, a representative of a U.S. 
company stated that business credit has almost dried up and 
Vasquez said that Banks are reducing credit lines and 
re-evaluating existing credit.  The business association CAINTRA 
conducted a survey of 300 members, and found that 40% of their 
members who had commercial bank credits found that the banks 
were demanding more guarantees and reducing their credit lines 
in half.  An additional 30% said that the Mexican Development 
Bank Nacional Financiera (Nafin) was cutting back their access 
to credit.  CAINTRA claimed publicly that 120 businesses would 
be forced to close in Nuevo Leon due to lack of credit.  In 
contrast, Roberto Guerra of the Fitch Credit rating company 
believed that credit and commercial paper were still fully 
available for solid companies, albeit at higher interest rates. 
Similarly, Amcham executive director Roberto Cavazos was 
blithely optimistic, stating that he did not believe that credit 
access was a problem for Amcham member companies (which run the 
gamut of small, medium, and large). 
 
 
 
¶6.      (SBU)  There are several areas which are clearly 
affected, such as financing for car purchases.  Katia Calderon, 
the local head of GMAC financing, reported that there was little 
liquidity to permit consumers to purchase cars, which has helped 
drive down car sales by 20% in Mexico.  Calderon was also upset 
that the Government of Mexico did not seem to understand the 
seriousness of the problem and had done nothing to help the 
sector.  In contrast, the governments of Brazil and Spain had 
programs to assist consumer liquidity. 
 
 
 
¶7.      (SBU)  The impact of the credit crunch appears to 
particularly have hit Small and Medium Sized Enterprises (SMEs). 
 Sergio Mata, head of the financing committee at CAINTRA, 
emphasized to Econoff that 70% of financing for formal SME 
businesses comes from credits from suppliers, usually against 
their accounts receivable.  The suppliers have made their terms 
stricter. For example, before the suppliers would provide credit 
up to 90% of the value of the accounts receivables, but now it 
is only 70%.  Mata also reports that banks are re-evaluating SME 
loans and reducing credit lines.  For example, CAINTRA surveyed 
2,000 SMEs, and found that very few had received new bank loans. 
 Mata also said that Nafin loan guarantees were not helping many 
SMEs because the commercial banks were not accepting the Nafin 
guarantees and were still looking for more collateral from the 
borrower. 
 
 
 
¶8.      (SBU) Felix Tejada of the Alles Real Estate group noted 
while  companies were consolidating operations to save money, 
they were not leaving Mexico.  Tejada reports that companies 
with sufficient cash flow are receiving financing, which they 
are using to cut costs by consolidating operations in one 
location, for example in Mexico City, Monterrey or Tijuana. 
Tejada was encouraged that these companies seem committed to 
remaining in Mexico. 
 
 
 
¶9.      (SBU)  Comment.  Despite several voices of optimism, we 
believe that the credit crunch is real and getting worse.  One 
Amcham member commented that Mexico today is in the same 
position as the United States was several months ago, before the 
financial crisis began to significantly impact the real economy. 
 End Comment. 
WILLIAMSON