Carstens Warns on US Debt Threat to LatAm

Latin America’s slowing economies could face “very severe” repercussions if US lawmakers fail to raise the government’s debt ceiling this week, Mexico’s central bank governor Agustin Carstens tells LatinFinance. “If there is a major breakdown [in US debt ceiling talks] and this is a prolonged issue, the consequences could be very serious,” Carstens says. His comments come as congressional leaders in Washington failed this weekend to break an impasse to avoid a possible sovereign default when the borrowing cap expires on October 17. Carstens says that Mexico’s economy – which has disappointed following a sharp slowdown in growth this year – could face severe headwinds if a deal is reached in Washington that chokes off US growth as a result of sharp spending cuts. In the case of a default, “the shock would be very strong,” he adds. “The main point is how the US government reacts. If they decide to cut government spending, they could go into recession. If there is a default then the financial sector and capital account would be the transmission mechanism [to the Mexico’s economy],” he says. Mexico’s public credit director Alejandro Diaz de Leon tells LatinFinance the threat of a US default is “like having an explosive device that could be deactivated if both parties agree.” He adds that while he expected a default to be avoided, uncertainty over US economic policy means that “volatility will be with us for quite some time.” Carstens says that Mexico’s economy – which faltered this year amid weak US demand for domestic exports and a slump in construction – is nevertheless poised for a rebound. If US leaders strike a longer-term budget deal and avoid breaching the debt ceiling, Carstens says a pick up in US growth to at least 2.5% would “give an additional push” to Mexico’s economy. He expects GDP to expand by up to 2.0% in 2013, compared to 3.8% last year. Carstens refused to be drawn on whether the central bank would reduce interest rates further to boost growth. “I