Saturday, February 21, 2009

Mexico Bond Risk Tops Brazil for 1st Time Since 2001

Mexico is riskier than Brazil in the bond market for the first time since at least 2001 as a war with drug traffickers, slowing exports to the U.S. and a record-low peso drive away investors. Mexican bonds are this year’s worst performers in Latin America after drug-related deaths climbed to 5,300 in 2008, the peso sank 31 percent in six months and a recession deepened in the U.S., the buyer of 80 percent of the country’s exports. In Brazil, which relies on the U.S. for 14 percent of overseas sales. It costs $446,000 to insure $10 million of Mexican debt with credit-default swaps, compared with $402,000 for Brazil. Credit- default swaps pay the buyer face value if a country defaults in exchange for the underlying securities or the cash equivalent. Yields on Mexico’s 8.3 percent dollar bonds due in 2031 are above those on similar-maturity Brazilian bonds even though Mexican debt is rated higher. Mexico’s bonds yielded 7.53 percent, four basis points, or 0.04 percentage point, more than the yield on Brazilian securities. Earlier this decade, prices for the countries’ credit default swaps were reversed. Protecting Mexican debt cost an average of $129,000 from 2001 to 2008, according to data compiled by Bloomberg. In Brazil, which has posted budget deficits as big as 7.9 percent of gross domestic product in the past 10 years, the average cost was $563,000. Brazil had an average budget deficit equal to 3.1 percent of gross domestic product over the past six years. Mexico, Latin America’s second-biggest economy after Brazil, posted an average gap of 0.2 percent. Credit-default swap rates converged as the U.S. recession cut Mexican exports by 14 percent in the fourth quarter and reduced migrant worker remittances for the first time since the central bank began tracking transfers in 1995. The drug war is eroding investor confidence and reducingannual gross domestic product by 1 percentage point, according tothe government. Narcotics-related deaths more than doubled lastyear as President Felipe Calderon’s crackdown increasedcompetition between gangs for the best supply routes to the U.S. “There’s a lot of focus on drugs and crime in Mexico,”said Jonathan Binder, who manages more than $2 billion at INTLConsilium LLC in Fort Lauderdale, Florida. “It’s one of the hottopics that has come through.” Atkin said the war, which has deteriorated intodecapitations and grenade attacks, raises questions about “thefundamental stability of the country.” Mexico had a current account deficit, the broadest measure of trade, of $6.6 billion in the fourth quarter, according to themedian of six economists in a Bloomberg survey. That would be thewidest since the 1994 deficit that triggered a 49 percent pesodevaluation. Oil is responsible for much of the decline because Mexico isthe third-biggest supplier to the U.S. The country’s crudeproduction fell last year at the fastest pace since 1942 at thesame time that prices plunged 74 percent from a July record.

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