And why are Bank of Mexico executives and employees resigning in droves?

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET .

Around 200 central bank employees, including 20 senior executives, have left their posts at the Bank of Mexico (Banxico) since presidential elections on July 1 handed a resounding victory to populist Andrés Manual Lopez Obrador (or AMLO). Unsurprisingly, their sudden departure has a lot to do with money.

One of AMLO’s manifesto pledges was to slash salaries for senior government officials and bureaucrats as part of sweeping cost-cutting measures. So far, he’s kept to his word. Last week, Congress, now under the majority control of his party, Morena, passed a law that will make it impossible for any state employee to earn more than the president. The gross monthly salary of the current president, Enrique Peña Nieto, is 209,135 pesos ($11,700). AMLO has pledged to cut the salary in half when he takes over the post on December 1.

The law will come into force in January and will apply to all three federal branches of government as well as regional and local government institutions. This could be a major problem for employees of Banxico, since all of them are considered public officials and many of them earn more than the current president. The average monthly salary of a Banxico board member is 365,000 pesos ($19,400), around 70% more than Peña Nieto’s and over 230% higher than the salary AMLO has pledged to pay himself.

Banxico has refused to comment on the matter but it’s safe to assume that the gathering exodus of central bank employees has at least something to do with AMLO’s plan to slash their salaries. Mexico’s central bank workers, it seems, are less enthralled by the austerity principle when it’s applied to their own income rather than others’. Naturally, many of the officials leaving Banxico will slot seamlessly into better paid jobs in the private sector, where their expert knowledge and lists of handy contacts will be put to excellent use.

The departure of hundreds of central bank workers could also be a sign of how relations may evolve between Mexico’s new government and its top financial regulator and lender-of-last-resort. The president elect has already ruffled feathers at Banxico with a fiery speech during his “Thank-you Tour” of Mexico last week. While vowing not to impinge on the central bank’s much vaunted independence — independence from the interference of politicians, not banks — he also warned that if economic problems do emerge in the future, it will not be his or his government’s fault.

“We are only going to invest and spend what comes into public coffers; we are not going to fall into what is technically called a deficit,” he said. “We will not act irresponsibly… We will respect the Bank of Mexico’s independence, so that there is macroeconomic balance and no inflation.” But if economic conditions deteriorate, he added, “it will not be the President of the Republic’s fault, but rather due to external circumstances or the Bank of Mexico’s poor handling of financial policy.”

It’s a shot across the bow, with a stark message for Mexico’s central bankers: tread carefully. It’s the first time in a long time that a Mexican president — or in this case, a president-in-waiting — has adopted such an adversarial tone towards the country’s central bank.

But that was not the most incendiary part of AMLO’s speech. That honor goes to the part where he said that Mexico’s economy is already bankrupt.

“Because the country is going through a very tough economic situation, a situation of bankruptcy, we may not be able to fulfill all of the demands being made of us, but rest assured we will fulfill all we promised in the campaign.”

It’s an odd remark, coming from a man who is on the verge of becoming president, particularly one who seconds earlier had promised to act responsibly in economic matters. Presumably, after making so many lofty promises to so many people during the election campaign, AMLO is now trying to walk back those commitments by underscoring the frailty of Mexico’s economy. But to use the dreaded “B-word” to describe that economy’s current state is reckless, especially at a time that market pressures are building across emerging economies.

Whatever AMLO might say in the heat of the moment, Mexico’s economy is far from bankrupt. Unlike certain other Latin American economies, it has not gambled away all trust and can still service its public debt pile with relative ease. But it is only 36 years ago that Mexico last defaulted, during the Latin American Debt Crisis of the early eighties.

Thankfully, memories are short, and today Mexico’s economy is in better shape, although growth is weak, poverty and inequality are still rife and the state-owned oil company Pemex still shows no sign of curing its addiction to debt. Inflation, at just under 5%, is a shadow of its former self.

Mexico’s public debt-to-GDP ratio of just under 50% is also relatively modest by today’s standards. But when it comes to debt, everything is relative, especially if you if you borrow in a foreign currency that you don’t control.

That, right now, is the biggest risk for Mexico’s economy. As the dollar rises and the burden of the foreign-currency denominated debt grows in peso terms, more and more of the States’ limited financial resources must be used to service it. Meanwhile, rising Federal Reserve rates are luring investors away from emerging markets and back to the US. These conditions are not dissimilar from those that prevailed on the eve of Mexico’s Tequila Crisis (1994-95), which left a brutal economic hangover in its wake.

Today, investors are still fairly sanguine about the prospects of Mexico’s economy. They barely blinked when AMLO said the economy is bankrupt. But if relations continue to sour between the new president and the country’s central bank, eventually investors will begin to sit up and pay attention. By Don Quijones.

Systematic “Petro-Plunder,” as we’ve come to call it, bedevils Mexico’s energy sector. Read… Gangs of Oil Thieves Expand Their Business Model

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