Mexico gets a debt downgrade--what country is next?

12/15/2009 11:45 am EST


Jim Jubak

Founder and Editor,

Another day, another country downgraded.

This time it’s Mexico following the path blazed by Greece. On December 15, Standard & Poor’s downgraded the country’s sovereign debt to BBB from BBB+. (Fitch Ratings had already downgraded the country on November 23.) That leaves Mexico’s rating still at investment grade, but the trend isn’t encouraging.

Especially when you look at why S&P downgraded the country’s debt rating.

With oil revenue, the source of about 35% of the government’s revenue falling, S&P was looking for the country to diversify its revenue stream by raising other taxes. Mexico’s oil production has tumbled from 3.4 million barrels a day in 2004 to 2.6 million barrels a day this year as Pemex, the national oil company, has exhausted easy to pump reserves and underinvested in technology to increase the amount of oil that could be recovered from existing fields.

President Felipe Calderon had asked Congress to increase the country’s value-added tax by two percentage points to 17% and to put a 2% tax on food and medicine. That would have been the first time food and medicine had been taxed. Congress, controlled by the opposition Institutional Revolutionary Party (PRI), balked and raised the value-added tax by just one percentage point and omitted the tax on food and medicine completely.

And that triggered the downgrade.

Next year will put a lot of countries, including the United States, Japan, and the United Kingdom, in exactly the same spot where Mexico finds itself now. The credit rating companies and investors will be looking at the budgets these countries propose to see if their leaders are proposing a credible plan that would get deficits under control in the long-term.

The countries that I’ve named are the usual suspects, but in 2010 the list of problem debtors is likely to expand to take in some new names. Now off the radar screen, these countries could make the list in 2010 because of the way that their debt is structured. Germany, for example, will see its need to issue bonds rise to $307 billion in 2010 from $230 billion in 2010.

That’s likely to be enough to draw attention from investors and rating companies in a year when potential problems with sovereign debt will be near the top of investors’ minds.

Thank Japan, the United Kingdom, the Eurozone countries, and the United States for raising those worries by issuing new debt as fast printing presses can in 2009.  In 2009 those economies issued a record $3.95 trillion in government bonds. That an 86% jump from 2008. In the United States alone government debt issuance has climbed to $2.1 trillion from $890 billion in 2008.

See why the debt markets might be a little on edge?
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