Mexico prepared for any U.S. default: central bank head

MEXICO CITY | Mon Oct 14, 2013 10:20am EDT

(Reuters) - Mexico has the liquidity necessary to handle the extreme and unlikely event of any debt default by the United States, Mexico's Central Bank Governor Agustin Carstens told a local newspaper in an interview.

Highlighting Mexico's $170 billion in reserves and its flexible credit line from the International Monetary Fund, for use in cases of emergency, Carstens said he was confident Mexico could face any U.S. default.

"Mexico is well prepared to confront it," Carstens told El Economista in an interview published on Sunday evening. "We have taken due care in the management of international reserves and we are well provisioned."

"The problem is so serious because the obstacle is political in nature, not financial nor economic."

While there were promising signals emerging from U.S. Senate negotiations on Sunday, there were no concrete moves toward passing legislation needed to fund the government and raise its borrowing authority in time to avoid a default later on Thursday.

Chief economist at Mexico Finance Ministry Ernesto Revilla said last week Mexico's slowing economy could face an "extreme situation" if the United States fails to raise its debt ceiling.

Mexico's economy has stumbled this year amid slack U.S. demand for local exports and a drop in domestic construction. The United States is Mexico's top trading partner, the destination of about 80 percent of Mexican exports.

Following Mexico's shock economic contraction in the second quarter and devastating floods last month, the government has repeatedly cut back its growth forecast and now expects gross domestic product to expand by around 1.7 percent this year.

Carstens told El Economista he believed Mexico's slowdown would be temporary, but that the central bank would have to revise its forecast of between 2 percent and 3 percent economic growth for 2013 in its next inflation report.

The International Monetary Fund last week slashed its 2013 growth outlook for Mexico after a weaker-than-expected first part of the year, and it also dialed back expectations for growth in Brazilnext year.

The IMF said Mexico's gross domestic product (GDP) would grow 1.2 percent this year, down from a 2.9 percent expansion it forecast in July, due to low government spending, a drop in construction and slack U.S. demand for local exports.

Taking advantage of cooling inflation, Mexico's central bank has cut its benchmark interest rate twice this year to a historic low of 3.75 percent, in a bid to boost sagging growth.

In a separate interview with Excelsior newspaper, Carstens said he sees a broader role for the bank than simply managing price hikes.

"Our duty is not just to (make sure inflation) converges towards its target, but to do it in the best way possible," Carstens said in an interview published Monday. "If a space opens up, such as a chance to lower a reference rate, we have to take advantage of that opportunity," he said.

Data earlier this month showed annual inflation eased in September for the fifth month in a row to an eight-month low of 3.39 percent.

The central bank's annual inflation target is 3 percent.