Calderón administration slams Mexico's state governments for spiraling debt

Ahead of next year's presidential race, Mexico's ruling party is touting fiscal responsibility since most indebted states are run by the opposition, but unlike in the US, most voters don't seem to care.

The administration of Mexican President Felipe Calderón has been warning in recent weeks that while the federal government does not have the debt
problem plaguing so many other countries, its state governments are a different story.

Some states are growing dangerously indebted, federal officials warn. Spending and debt ceilings have surged in up to a fifth of Mexican states, with total local debt almost doubling since 2008, the finance officials say.

Some states are not even reporting how much they really owe. On Friday, the S&P downgraded the northern state of Coahuila by several notches after the rating agency discovered their debt was four times greater than previously reported.

The clash over debt has become highly politicized as parties gear up for presidential elections next July.

The Calderón administration's conservative National Action Party (PAN) is in a pitched battle with the Institutional Revolutionary Party (PRI), which holds most state governments and is the early favorite to win the race.

The PAN has seized on state debt as a sign of the PRI’s fiscal irresponsibility. Of course, not all indebted states are led by the PRI. Yet, the former governor of downgraded Coahuila also happens to be the current leader of the PRI.

The PAN points out that, in contrast, the federal government has brought Mexico’s deficit to around zero, a responsible policy they say has kept the economy solid despite a global slowdown.

But playing the debt card may not be as effective on voters in Mexico as it has been in recent elections in the United States: see the Republican comeback in midterm elections on calls for austerity and smaller government.

In Mexico, where close to half the population lives below the poverty line, and big government is not a dirty word, the recent flare-up over which parties are more fiscally responsible will not likely change voters’ minds, political analysts say.

“There is no study of voter intention where the fiscal debate is crucial or determinant to winning an election,” says Aldo Munoz, a professor of political science at the Autonomous University of Mexico State.

In Mexico “if you have a government that is very generous with public works and social projects, you don’t care if their spending was irregular, and you don’t care if the state has gone into debt,” he says.

Another factor may be that state-level debt in Mexico is not nearly as debilitating as the US debt headache. Mexico’s federal government is still in a position to help its local counterparts. And while federal officials have raised concern about states underreporting their debt, they stress that a handful of states will not hurt the country's overall finances.

But the state problem should be more relevant to the public, some economists say, because it could snowball. If it turns out that many local governments need Mexico to bail them out, it would become very expensive as the global debt crisis pushes credit costs higher, says Rodolfo Navarrete, an economist at Vector brokerage in Mexico City.

Emanuel Hernandez, an Internet radio DJ from Mexico City, acknowledges that state debt could hurt the country, no matter which party comes into power. But it won’t affect the way he votes, because other issues are more relevant: “The PRI robbed, but at least they gave something back to the people,” he says. “And the country has become less safe with the PAN.”

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