Mexico Seeks to Limit Amount Local Governments May Borrow

Fox Business ^ | January 18, 2013

[JerseyanExile]

Mexico's federal government may limit the amount of debt and the size of deficits that states and municipalities accumulate, as local debt levels have doubled in recent years and a handful of governments have defaulted on debt payments.

The proposal is tricky to maneuver because Mexican states are independent federal entities, complete with their own constitutions, and as such they may tap as much nonguaranteed debt as they like. The states do require congressional approval to issue long-term debt backed by their shares of federal tax revenue.

Local Mexican governments have limited independent revenue sources, relying instead on transfers from the federal government to cover close to 90% of their budgets. And much of their federal revenue is earmarked for spending on specific areas, such as education. State and municipal debt registered with the finance ministry stands at 3% of Mexico's more than $1 trillion annual gross domestic product, up from 1.5% in 2008. Such levels are well below that of the U.S., where outstanding local government debt hovers at 19% of GDP, and it isn't indicative of a broader macroeconomic crisis.

Nonetheless, recent high-profile defaults and incidents of mismanagement have put the issue on the federal radar.

In an interview, Deputy Finance Minister Miguel Messmacher called the trend of rising local government debt "clearly not sustainable," saying that discussions between Mexico's three biggest political parties and the finance ministry hinge on creating a "mechanism" that would limit "bad behavior" that could lead to sustainability problems in public finances.

Finance Minister Luis Videgaray reiterated this week the federal government's long-held stance that it won't bail out indebted local governments. The federal government doesn't guarantee local government debt, but it does monitor obligations guaranteed by income the states receive from their share of federal tax revenue.

[SunkenCiv]

Thanks JerseyanExile.