President Felipe Calderón acknowledged Tuesday that Mexico could face a sudden flight of foreign capital, abrupt changes in interest rates and sharp fluctuations in currency trading if the United States were to fall into a debt moratorium. He told radio talk show host Sergio Sarmiento that while the nation would almost certainly feel the impact of U.S. measures on the debt ceiling and budget constraints, “we are relatively prepared to minimize the negative effects of the measures that are adopted”.

The amount of foreign monetary reserves, and the financial system’s high degree of capitalization, would enable Mexico to absorb much of the impact of sudden capital flight, he said, noting that reserves held by the central bank now stand at US$132 billion, in addition to an International Monetary Fund emergency facility of US$72 billion, a total backup fund that is equivalent to twice the nation’s foreign debt.

Ultimately, said the president, he sees little likelihood that the United States will enter into a debt problem situation. The U.S. economy is still growing at a healthy pace, he said, as evidenced by the fact that Mexican exports have not been severely affected. For example, he said, automobile exports grew by 50% last year.

Talks Deadlocked

Following President Barack Obama’s warning that a six-month stopgap measure on the debt ceiling will not solve the problem and may not be enough to avoid a downgrade of the U.S. debt, Republican and Democrat leaders in Congress remained deadlocked Tuesday on a debt and deficit deal. A vote on House Speaker John Boehner’s two-stage proposal was delayed because it lacked enough votes among fellow Republicans.

The growing U.S. debt could cause “serious damage” to the economy is a solution is not found now, insisted Obama. “If we continue on this path, our growing debt could cost us jobs and generate serious damage to our economy”, he said. “If you want a balanced approach to the deficit reduction, let your congressmen know”, he urged.

For his part, Boehner said the United States cannot enter into a payment moratorium, but he warned that the American people will not accept an increase to the debt ceiling without significant government spending cuts and a comprehensive fiscal reform. He insisted that Republicans will not accept new taxes. Meanwhile, the dollar fell and the yen and euro kept gaining ground on the U.S. currency.

Business Issues Alert

In issuing an alert against external upheaval, the Mexican Employers Confederation (Coparmex) urged fiscal and monetary authorities and the Congress to concentrate on their responsibilities and uphold confidence among economic players in this new stage of internacional uncertainty.

Coparmex president Gerardo Gutiérrez Candiani asked the authorities to avoid being distracted by foreign issues, and to adopt adequate measures whenever necessary. “It’s better to be excessively cautious than to have to pay the price of being cereless”, he said.

The business leader insisted on the importance of taking decisive action, since we cannot rule out the possibility that the ongoing international upheaval could lead the world to another recession. He noted that the U.S. debt grew by 32% in the last three years to reach 72% of that country’s GDP, while in Europe the problem is no longer merely a liquidity crunch but a full fledged systemic crisis.

Inflation, a Threat

Inflation is bouncing back. In the first half of July, the Consumer Price Index rose by 0.32%, more than double the price increase recorded in the same comparative period last year, according to the National Statistics Institute (Inegi). It was the biggest fortnightly rise in three years, and analysts say it represents a warning of greater increases to come this year.

Scotiabank analyst Gustavo Hernández says the annual inflation rate went from 3.36% to 3.53% during the period, thanks largely to increases in fruits, vegetables and other foodstuffs, and cautions that medium-term inflation goals are now seriously compromised.

Invex analyst Ricardo Aguilar says the inflationary outlook is dire, since prices tend to rise more during summer vacation, with more to come in September when schools return and electric power rates rise. It was the first fortnightly inflation report by Inegi since it took over the task from the central bank. The institute cautions that higher corporate security costs are now beginning to have a direct impact on inflation.

Jobless Rate Rises

Mexico’s unemployment rate in June reached 5.74% in seasonally adjusted figures, placing the labor market on alert because it is the highest jobless level for a single month in 11 years and reflects a growing trend, analysts say. The figure was released last week by the National Statistics Institute (Inegi), and corroborates versions of a generalized economic slowdown.

“We are witnessing a structural failure of the Mexican economy, which is incapable of generating jobs even though the overall economic outlook is positive, and implies that judging from the latest monthly figures, unemployment is growing at a pace that is similar to what we lived through the 2008 crisis”, said José Luis de la Cruz, head of Monterrey Tech-State of Mexico Campus’ Economic and Business Research Center.

According to Inegi, employment levels have not recovered since 2008, when it stood at an annual average of 3.98%, but stayed above 5% in 2009 and 2010. As the rate keeps growing, and with the complicated global environment, it will be increasingly difficult to return to pre-crisis levels, said De la Cruz. He pointed out that programs that were implemented to curb unemployment were inefficient.

Also, check out the following opinion columns:

“The Great Depression”, by Enrique Campos

The union without a cause, namely the Mexican Electricians Union, is going to sue with all its might a woman motorist who hit a pole and toppled it against their illegal camp at the Zócalo. The workers of the now defunct Central Light & Power Co., camped out at the central square, enjoy the protection of city authorities, are making up a tall tale about how a police car was chasing the woman, who was allegedly intoxicated when she crashed. Prosecutors determined that she was not driving under the influence, but the incident reflects the permisiveness of city authorities with illegal groups, and the same can be said of the leftist PRD party. Just as this illgal group of unemployed electricians can take over the square, trampling the law and doing what they want, the trade unions have the strength to influence political action. When PRD legislators derailed approval of the labor reform with total impunity, not a single voter protested. They can do it because no one dares to put a stop to such backward positions.

“Strongbox”, by Luis Miguel González

If Greece has kept the World on edge over a debt of a mere US$529 billion, imagine what could happen with a U.S. debt moratorium. What if Congress and the White House don’t reach a deal on the debt ceiling? IMF chief Christine Lagarde wans of unimaginable global consequences. We’d face something similar to the Lehman debacle. Mortgages would skyrocket, and ATM lines would be even longer, says Simon Johnson of the Peterson Institute. The Fed’s Tim Geithner has been working for days on Plan B to pay suppliers and implement partial stoppages of public services. We’d face a second recession, warns Bert Patin of risk insurer Coface. For Mexico, it would mean capital flight and devaluation pressures. Debtcalipsis on the horizon. The U.S. debt is 27 times that of Greece, but the difference goes beyond the math. Almost every country is a U.S. creditor, holding dollar-denominated reserves, and thousands have dollar savings because they trust the Ben Franklin likeness. Armaggedon, after all, could happen.

rmena@eleconomista.com.mx