VZCZCXRO2730
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #0413/01 0442316
ZNR UUUUU ZZH
P 132316Z FEB 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 5109
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USNORTHCOM
RHMFISS/CDR USSOUTHCOM MIAMI FL
RHEHAAA/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 02 MEXICO 000413 
 
SENSITIVE, SIPDIS 
 
STATE FOR A/S SHANNON 
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH 
STATE FOR EB/ESC MCMANUS AND IZZO 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTERNATIONAL AFFAIRS (KDEUTSCH AND ALOCKWOOD) 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA) 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT:  GOM INTERVENES TO STOP SPECULATION ON PESO 
 
1.(U)SUMMARY.  The Bank of Mexico (Banxico) announced this week it 
would continue to intervene unannounced in the foreign-exchange 
market for the "foreseeable future", as a result of what analysts 
call "market-driven" speculation.  Analysts say the speculation last 
week had little to do with capital flight or economic conditions, as 
in other countries.  This time, the central bank had intervened 
directly with banks, rather than open auctions, when they noticed 
speculative movements by traders last week, which made the peso to 
depreciate 6.6% close to 15 pesos to the dollar the week of February 
¶2. Banxico governor Guillermo Ortiz yesterday said that the central 
bank isn't attempting to set the peso at a specific level, though it 
will continue to intervene should there be excessive volatility. End 
SUMMARY. 
 
¶2. (SBU) With close to $84 billion in reserves, the Bank of Mexico 
has intervened in regular auctions of $400 million when the peso has 
depreciated more than two percent. During last week's selling, the 
Bank of Mexico reportedly noticed banks, investors and hedge fund 
operators speculating on a more expensive peso (around 15 to the 
dollar). A Bank of Mexico official explained to us that using 
privileged information concerning companies' needs for dollars to 
pay foreign debt, and knowing the amount of reserves and the current 
liquidity problems, banks "played" the central bank's auction system 
for its own profits. 
 
CRITICISMS: TRANSPARENCY? 
------------------------ 
 
¶3. (SBU) The Bank of Mexico's direct interventions have caused Fitch 
Ratings to be concerned.  On February 11, the ratings company noted 
publicly that the lack of transparency in these dollar injections 
could cause it to revise Mexico's sovereign debt rating downward. 
Shelly Shetty, Fitch's Senior Director of Sovereign Debt for Latin 
America told the media the central bank was jeopardizing Mexico's 
commitment to a floating exchange rate.   However, several analysts 
said that the amount of dollars directly injected by the central 
bank was very similar to the auctions of previous weeks.  More than 
setting a fixed exchange rate, the Bank of Mexico is restricting the 
excessive volatility to stabilize the peso and contribute to 
financial stability.  Complicating factors, especially for outside 
observers, is the fact that unlike the U.S. Fed or countries in the 
regional (e.g. Colombia), Mexico's central bank does not make public 
minutes of its meetings. 
 
 
¶4. (U)  Local analysts note that the Bank of Mexico's intervention 
is not different from what other central banks are doing, 
particularly in emerging countries.  Additionally, Mexico's foreign 
reserves are still high despite the central bank's interventions. 
Unlike 1994/1995 the Bank of Mexico now reports the level of its 
foreign reserves on a weekly basis.  There has certainly been 
capital flight from Mexican bonds to U.S. Treasuries --$11 billion 
in the past six months-- given the global situation and risk 
aversion to emerging markets, but last week's volatility was 
explained by the speculators' maneuvers. 
 
RESERVES STILL STRONG 
--------------------- 
¶5. (SBU)  Since October 2008, the Bank of Mexico has intervened the 
foreign exchange market with a total of $ 17.9 billion, which 
analysts compare to the amount of foreign direct investment expected 
for 2008. Last week, the central bank injected $1.1 billion to prop 
up the currency.  Banxico's foreign reserves fell to $82.1 billion 
in the week ending February 6. 
 
¶6. (U) There have been cases of Mexican companies that have had 
problems as a result of the weaker peso, but so far the government 
has been able to tackle that problem with guarantees provided by 
NAFIN, a Mexican development bank.  If need be, the U.S. Fed has 
also established a reciprocal swap liquidity arrangement for about 
$30 million.  Finally, in case of extreme distress, the authorities 
can approach the IMF and borrow up to $23.5 billion under the 
recently established Short-Term Liquidity Facility. 
 
FUNDAMENTALS ARE STRONG, SAY 32 TOP ANALYSTS 
-------------------------------------------- 
¶7. (SBU) Despite the global crisis and the U.S. and domestic 
 
MEXICO 00000413  002 OF 002 
 
 
recession, both the government and the IMF are convinced economic 
fundamentals in Mexico are still solid this year.  Mexico's current 
account deficit, (Note: projections for 2009 range from 2% to 4% of 
GDP versus 8% of GDP in 1994), 
its low foreign debt, revenues associated with the hedging of oil 
prices during 2009 (estimate of $9 billion), and the fact that the 
government's foreign exchange needs are covered y reserves with a 
ratio of 3 to 1 are all positive factors.  Altogether, these facts 
influenced the positive judgment of thirty-two of Mexico's most 
important analysts surveyed by the Bank of Mexico in January. This 
group projected an exchange rate of 13.50 pesos to the dollar by the 
end of 2009.  This is far from the "super peso" (at 9 or 10) of 
previous years, but reasonably close to current levels (14). 
 
COMMENT: 
------- 
¶8. (SBU) COMMENT.  The Mexican Banking Association strongly denies 
that the peso will collapse as it did during the 1995 "peso crisis", 
mainly because companies have less debt in dollars these days.  The 
conventional wisdom here is that the government and financial 
markets learned the lessons of 1995, and built in the kind of 
protections that other countries are only now learning about. In 
addition to market-driven speculation, there is no doubt that the 
peso will continue to be vulnerable to the more traditional factors, 
i.e. a deepening recession in the U.S. and its effect on Mexico's 
real economy such as exports, FDI, tourism and remittances.  And as 
in other currencies, the peso will also react to U.S. investors' 
confidence or jitters on the impact of the U.S. stimulus package. 
BASSETT