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. Â 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?
Inflation is the answer. We get a little hyper-inflation going on, and suddenly our current debt doesn’t look so big anymore. Except we’ll probably just pile on even more debt because we can.
Jim, I’d like to throw you a hypothetical that you alluded to. Let’s say the U.S. gets a debt downgrade next year. What happens to the markets, and where is the best place to invest in that circumstance? Gold perhaps?
Jim,
Very interesting post! How do you differentiate between sovereign debt and ‘shared sovereign’ debt? I.e. USA and the so called EUROZONE are different in the way they deal with sovereign debts? What will be the impact of expected troubles in some of ‘limited sovereign’ debt in Europe? For example Spain, Germany, Italy in 20210 and 2011?
looking forward to get back into brazil, I felt reluctant to get rid of brf. I do hope to invest in brazil for the long run.
doydum, I guess I don’t understand why you see a contradiction. In that post I said that I doubted thatg debt would outperform equity over the next decade. That would seem to be consistent with a prediction of more sovereign downgrades ahead. You’ll note that you can’t say that the biggest danger is in emerging markets across the board. I think you’ll do better in emerging market debt than in developed economy debt–if yhou pick the right emerging economies. That’s why I adovocated two actively managed funds rather the ETFs. Right now you don’t have an easy way to invest in China debt. I’m not sure that I’d put money in Russian debt considering the arbitrary way that economy can operate. Brazil seems a good bet. India a maybe.
How do we reconcile this post with the recommendations in https://jubakpicks.com/2009/12/14/bonds-killed-stocks-in-the-last-10-years-but-how-about-the-next-10/ ?
so this means, invest in BRIC?
Jim,
So with this many developed nations having problems with their debt rating. Will this trigger an worldwide increase in taxation? Where do all these countries go from here?