Mexico's Financial Challenges Debt-initely Not a Joke

In global economics, national debt often emerges as a focal point of concern, debate, and strategy. The term itself can evoke a spectrum of emotions, from anxiety to apathy, depending on who you ask. For Mexico, a country whose debt represents approximately 48.5% of its Gross Domestic Product (GDP), the narrative surrounding debt is far from straightforward.

Recently, the Ministry of Finance took a significant step by settling the early payment of a bond worth $894 million, originally due in April 2025. This preemptive move was designed to ease the financial burden on the next administration. But beyond this tactical maneuver lies a broader question: what is the true magnitude of Mexico's debt, and how does it affect the nation’s public spending and economic stability?

To delve into these complexities, we consulted Rosalío Luis Rangel Granados, Director of Income-Expense at the prestigious Center for Public Finance Studies (CEFP). His insights provide a nuanced perspective on the relative nature of national debt and its implications for economic policy.

The Global Debt Comparison

To understand Mexico's debt situation, it’s helpful to place it within a global context. When compared to economic giants like the United States and Japan, Mexico’s debt ratio might appear modest. The U.S., for instance, carries a debt load that is 1.5 times its GDP, a staggering figure that dwarfs Mexico’s. Japan’s situation is even more extreme, with a national debt that is 2.5 times its GDP—five times higher than Mexico's.

However, as Rangel Granados points out, the absolute size of a country’s debt in relation to its GDP is not the sole, or even the most important, factor. “What really matters,” he emphasizes, “is a country’s ability to pay.” This ability is shaped by a range of factors, including the country’s economic strength, fiscal policies, and the overall health of its public finances.

Take, for example, Guatemala, a Latin American neighbor whose debt is about 25% of its GDP, or Luxembourg, where the ratio is 30%. On paper, these figures suggest a more conservative debt strategy. But as Rangel Granados notes, these numbers are relative. “It is useless for a country to owe 10 percent of its income if it does not have the means to pay,” he explains. The crux of the issue lies in whether a country has the economic resilience and fiscal mechanisms to service its debt without compromising its growth and stability.

When More Isn’t Necessarily Worse

One might assume that a higher debt-to-GDP ratio is inherently problematic, but the reality is more complex. In nations like the United States, where debt levels are extraordinarily high, the capacity to manage and even expand debt is bolstered by a robust economy, deep financial markets, and the global dominance of the U.S. dollar. The U.S. can borrow at lower interest rates than most countries and has a unique ability to print its own currency to meet obligations—options that are not as readily available to other nations.

Japan, despite its astronomical debt levels, has maintained relative economic stability. This is partly due to the fact that the majority of its debt is held domestically, reducing the risks associated with foreign currency fluctuations and external economic pressures. Furthermore, Japan’s central bank plays a proactive role in managing debt through policies that include negative interest rates and aggressive bond-buying programs.

For Mexico, the situation is different. While the debt-to-GDP ratio is much lower than that of the U.S. or Japan, Mexico does not enjoy the same economic leverage or monetary flexibility. The government must be more cautious in managing its debt, ensuring that it remains sustainable without stifling economic growth or social development.

A Move to Secure the Future

The recent decision by Mexico’s Ministry of Finance to settle a $894 million bond ahead of schedule underscores a strategic approach to debt management. By paying off this obligation early, the government aims to reduce the fiscal pressure on the next administration, creating a more stable financial environment moving forward. This move is particularly significant in a country where political transitions can bring shifts in economic policy, potentially affecting market confidence and financial stability.

Early debt repayment can also send a positive signal to international investors and credit rating agencies, showcasing Mexico’s commitment to prudent fiscal management. This, in turn, can help maintain or even improve the country’s credit rating, which influences borrowing costs and access to international financial markets.

However, the long-term impact of such a strategy depends on broader economic trends and fiscal policies. If the government can maintain a balance between debt reduction and investment in critical areas like infrastructure, education, and healthcare, the benefits of early repayment could be substantial. Conversely, if the focus on debt reduction leads to austerity measures that stifle growth, the country could face economic challenges down the line.

A Pastry War and a Debt to Remember

For Mexico, the story of national debt is not just an economic tale but a saga that weaves through the very fabric of its history, culture, and identity. The roots of this debt trace back to the birth of the first Mexican federal republic in 1824, when the fledgling nation, grappling with fiscal deficits, reached across the Atlantic to the European financial markets. The country’s leaders turned to England, the financial powerhouse of the era, marking the beginning of a financial relationship that would set the stage for centuries of debt accumulation.

But Mexico's entanglement with debt is more than a series of financial transactions; it is a narrative intertwined with episodes of political turmoil, international conflict, and the complex diplomacy. Among the many chapters in this story, one stands out for its peculiar mix of farce and consequence—the Pastry War of 1838, when Mexico found itself at odds with France over a seemingly trivial dispute that would nonetheless leave a lasting imprint on its financial history.

When Mexico gained independence from Spain in 1821, it inherited not just a new identity but also a host of challenges, chief among them the need to stabilize its economy. The young republic was soon faced with the harsh realities of nation-building—restoring infrastructure, establishing a functioning government, and, crucially, managing its finances. By 1824, the government sought to address its growing fiscal deficits by borrowing from European markets, with England being the primary source of loans. This decision, born out of necessity, marked the beginning of Mexico's long and complicated relationship with foreign debt.

A Spiral of Debt

The loans taken in these early years were intended to finance the essential functions of the state, but they also set a precedent. As Mexico continued to borrow, the debt began to accumulate, driven by a combination of economic necessity and the pressures of maintaining sovereignty in a turbulent world. The burden of these debts would grow, as would the challenges of repayment, setting the stage for future financial crises.

Fast forward to 1838, a year when Mexico’s financial troubles took an unexpectedly quirky turn. The event in question is the Pastry War, a conflict that seems almost absurd in its origins. It all began with a French pastry chef in Mexico City who claimed that his shop had been looted by Mexican officers during the chaotic years following independence. When the Mexican government refused to compensate him, the French government seized upon this incident, demanding not just repayment but a substantial indemnity for all French citizens who had suffered damages during Mexico's struggle for independence.

France's response was swift and severe. In April 1838, French forces invaded Mexico, blockading its ports and bombarding the city of Veracruz. The conflict, though short-lived, was a stark reminder of the vulnerability of the young Mexican state in the face of European powers. By March 1839, Mexico had little choice but to agree to a peace settlement that included paying 600,000 pesos in compensation to French residents—a significant sum for a nation already struggling under the weight of its debts.

The Pastry War, with its origins in a seemingly minor grievance, had profound implications. It highlighted Mexico's precarious financial situation and its susceptibility to external pressures. More importantly, it added another layer to the country’s already burgeoning debt, reinforcing the cycle of borrowing that would continue to haunt Mexico for years to come.

A Debt as Old as Time

The story of Mexico's debt is, in many ways, the story of its struggles to find a stable financial footing in a world that often seemed determined to undermine it. As Rosalío Luis Rangel Granados, Director of Income-Expense at the Center for Public Finance Studies (CEFP), aptly observes, "Debts accumulate, especially when countries do not have the capacity to pay and do not generate sufficient income to cover their expenses and have to resort to debt to pay those shortfalls."

This pattern of accumulating debt is not unique to Mexico, but it has been particularly pronounced in the country’s history. From the early loans taken in the 1820s to the indemnities paid to France in the 1830s, and beyond, Mexico has repeatedly found itself in situations where borrowing was the only viable option to cover fiscal shortfalls. Each new loan, each indemnity paid, added to the mountain of debt that future generations would have to manage.

The ancestral nature of this debt is not just a historical curiosity; it is a reminder of how the past continues to shape the present. The decisions made by Mexico’s early leaders, often in response to immediate crises, have left a legacy that persists to this day. Modern Mexico, with its sophisticated financial systems and robust economy, is still dealing with the echoes of debts incurred nearly two centuries ago.

The Changing Face of Debt

In the national finance, debt is both a necessary instrument and a complex challenge. For Mexico, navigating indebtedness involves a delicate balancing act between domestic and international obligations. At the heart of this financial endeavor lies the Treasury Certificates, or Cetes, which have become a cornerstone of the country’s domestic debt strategy. But understanding how these instruments fit into Mexico’s broader debt picture requires a closer look at both the historical evolution and the current dynamics of national and international borrowing.

The narrative of a nation's debt can be divided into two distinct categories: external and internal. External debt encompasses obligations to foreign entities such as international private banks—think Chase Manhattan and Exim Bank—as well as European banking giants like Scotiabank and Santander. It also includes loans from multilateral organizations, including the International Monetary Fund (IMF), the World Bank, and the Inter-American Development Bank (IDB). These entities provide funds that can be used for a range of purposes, from infrastructure projects to economic stabilization.

On the flip side, domestic debt refers to the money borrowed from within the country. This includes loans from national banks and, most significantly in Mexico’s case, the issuance of Treasury Certificates, or Cetes. Cetes are government-backed securities that Mexicans buy, effectively lending money to the government in exchange for a promised return. They play a crucial role in financing public expenditures and managing short-term cash flow.

A Shift in Perspective

Historically, the balance between external and internal debt has shifted. At the close of the 20th century, Mexico's debt landscape was predominantly characterized by heavy reliance on foreign banks. Fast forward to today, and the scenario has flipped. A remarkable 82% of Mexico's public debt is now held by domestic banks, with just 18% owed to international creditors. This shift underscores a significant change in Mexico’s debt strategy, reflecting a broader trend towards domestic borrowing.

Cetes, introduced in 1987, are often overshadowed by more glamorous financial instruments, but they are the workhorses of Mexico’s debt management strategy. These government-issued securities are sold at a discount and mature at face value, providing a predictable return for investors. They are favored for their stability and the relative simplicity of their structure, making them an attractive option for both individual and institutional investors.

The appeal of Cetes lies in their fixed nature and the relative safety they offer. Unlike variable-rate debt, which can fluctuate with market conditions and impact repayment amounts, Cetes provide certainty in terms of both return and risk. This stability is especially valuable in times of economic uncertainty, when interest rates can swing dramatically.

The Interest Rate Puzzle

As of now, the national interest rate stands at 11%, a figure that reflects the broader economic environment and the government’s need to offer competitive returns to attract investors. In contrast, global benchmark rates are significantly lower. The US Treasury rate for three-month bonds hovers around 5%, while the London Interbank Offered Rate (Libor) is approximately 6%. These rates serve as global financial benchmarks and influence how Mexico’s domestic debt instruments, including Cetes, are perceived in the international market.

The evolution of debt management is marked by a transition from variable to fixed interest rates. Historically, much of Mexico’s debt was contracted at variable rates, exposing the country to fluctuations in interest rates. This variability meant that changes in global financial conditions could directly impact the cost of borrowing, creating potential instability in public finances.

In contrast, the modern approach favors fixed interest rates, which provide greater predictability and protection against the volatility of interest rates. This shift helps stabilize government finances and simplifies budgeting, as the cost of debt remains consistent throughout the life of the loan. By locking in fixed rates, Mexico reduces its exposure to the whims of the financial markets and secures more predictable financing.

The interplay between domestic and external debt, the role of Cetes, and the choice between fixed and variable interest rates all have significant implications for Mexico’s financial stability and economic health. The focus on domestic debt, with its reliance on instruments like Cetes, reflects a strategic move to bolster financial stability and reduce vulnerability to international market fluctuations.

However, managing debt is not without its challenges. As the national debt grows and interest rates fluctuate, the government must navigate a complex landscape of financial obligations while ensuring that public spending remains sustainable. The balance between attracting domestic investment through Cetes and managing external debt remains a critical aspect of economic policy.

A Strategic Approach to Refinancing

In national finance, where balance sheets meet policy decisions, the concept of refinancing emerges as both a strategic maneuver and a sophisticated art form. For Mexico, refinancing isn’t just a bureaucratic exercise; it’s a crucial element of financial strategy designed to manage debt, smooth out fiscal pressures, and maintain economic stability. The government's approach to refinancing reflects a blend of cautious optimism and strategic foresight, aiming to ensure that future administrations inherit manageable financial obligations.

Refinancing, in the context of national debt, is akin to conducting a high-stakes move, where every step is calculated to maintain balance and grace under pressure. The latest news on Mexico's refinancing strategy reveals a nuanced and sophisticated approach to debt management. The government’s ability to reschedule liabilities reflects its strong credit performance and the minimal risk of default. This is a testament to Mexico’s careful engineering of its financial strategy, designed to alleviate future payment pressures and foster a stable economic environment.

At the core of this strategy is the conversion of external debt into internal debt—a financial sleight of hand that allows the government to manage its obligations more effectively. By shifting debt from international creditors to domestic sources, Mexico reduces its exposure to global market fluctuations and currency risks. This conversion not only aligns with the government's fiscal objectives but also aligns with its broader economic strategy of maintaining financial stability.

Leveraging Favorable Conditions

The Mexican government’s refinancing strategy is marked by its astute use of market conditions to its advantage. By rescheduling debt payments under favorable terms, the government can offer attractive yields to creditors while benefiting from lower costs. For instance, the government’s recent decision to pay off $4 billion in external debt, despite not initially contracting the full amount authorized, demonstrates a tactical use of favorable exchange rates and interest conditions.

This approach is not merely a matter of fiscal convenience; it’s a calculated strategy to minimize debt servicing costs. By paying off debt early when market conditions are favorable—such as when interest rates are low or the national currency is strong—the government can reduce its overall debt burden. This practice is akin to finding a financial sweet spot where the cost of debt repayment is minimized, benefiting both the government and its creditors.

The art of refinancing involves proposing payments that are slightly higher than the current market value of debt securities. This tactic ensures that creditors are incentivized to agree to early repayment, while the government benefits from paying less than it would by maintaining the debt for its full term. It’s a strategic balancing act that reflects Mexico’s commitment to managing debt levels prudently.

The Tax Evasion Problem

Mexico’s approach to refinancing is part of a broader effort to address deeper fiscal challenges. The country’s debt has accumulated over the years due to a combination of factors, including insufficient economic growth and persistent revenue shortfalls. The government has faced the dual challenge of needing to finance public expenditures while grappling with limited revenue sources.

One of the central issues has been Mexico’s income tax problem. Tax collection has been a persistent challenge, exacerbated by tax evasion and avoidance. The government has made efforts to increase tax revenue and address these issues, but systemic problems persist. The infamous case of the Salinas Group, known for exploiting loopholes and regulatory gaps, highlights the broader issue of tax avoidance and the difficulties in enforcing tax compliance.

Addressing these challenges requires a multifaceted approach. The government’s emphasis on enhancing tax collection and reforming the tax system reflects an understanding that long-term fiscal stability depends on both managing debt effectively and ensuring adequate revenue streams. This approach underscores the importance of a comprehensive strategy that balances debt management with efforts to enhance fiscal health.

Looking ahead, Mexico’s refinancing strategy will continue to evolve in response to changing economic conditions and fiscal needs. The government’s ability to navigate these complexities will be crucial in maintaining economic stability and ensuring that debt levels remain manageable. As the global financial landscape shifts and domestic challenges persist, Mexico’s approach to refinancing will need to adapt to new realities.

The principles underlying Mexico’s refinancing strategy—leveraging favorable conditions, converting external to internal debt, and managing fiscal challenges—will remain central to its financial management. By continuing to refine its approach and respond to evolving market conditions, the government can ensure that it remains on a path toward sustainable economic stability.

From Shortfalls to Gradual Gains

In economics, debt often plays the role of a figure that can either support or undermine a nation’s financial stability. The concept of debt is frequently cast in a negative light, yet, intriguingly, it holds the potential to be a self-sustaining force, driving growth and prosperity when managed judiciously. For Mexico, understanding how debt can pay for itself is central to its evolving fiscal strategy, balancing between the potential for economic enhancement and the risks of financial mismanagement.

Mexico's journey toward effective tax collection is akin to a long, winding road through a landscape of economic challenges. As Rosalío Luis Rangel Granados explains, the nation's tax collection has seen gradual improvement since the early 2000s. At the dawn of the century, tax revenues represented just 11% of GDP, a figure that starkly contrasts with the 40-70% collection rates seen in Scandinavian countries and the 34% average for industrialized nations.

Today, Mexico's tax collection stands at 17% of GDP—an improvement, yet still modest when compared to global standards. The informal economy, characterized by unregistered businesses and under-the-table transactions, remains a significant hurdle. This sector not only skews the accuracy of tax revenues but also limits the government’s ability to collect taxes effectively. Additionally, the persistent challenge of poverty and low wages has meant that many citizens are exempt from paying taxes, further straining the nation’s fiscal resources.

Productive vs. Consumptive Debt

The historical approach to managing low wages involved providing subsidies and credits, rather than increasing tax revenues. This method offered short-term relief but failed to address the underlying issue of insufficient income generation. As salaries and employment conditions improve, so too does the capacity for tax collection. This positive correlation underscores a critical principle: as the economic conditions of individuals and businesses enhance, so does their contribution to the nation’s coffers.

The true potential of debt lies in its capacity to be a catalyst for economic growth, rather than a mere burden. When debt is strategically employed to fund investments in infrastructure—such as roads, bridges, dams, telecommunications, and tourism—it has the potential to generate substantial returns. These investments create jobs, stimulate economic activity, and ultimately enhance the nation's revenue base.

Think of debt as a seed that, when planted in fertile ground, can grow into a thriving tree. The debt incurred for building infrastructure is akin to investing in high-yield crops. The returns come in the form of increased productivity, improved business environments, and higher overall economic growth. For Mexico, this means that well-placed investments funded by debt can indeed "pay for themselves" by fostering economic conditions that lead to increased income and tax revenues.

The narrative shifts dramatically when debt is used for current expenditures rather than capital investments. When borrowed funds are allocated to day-to-day consumption—such as paying government salaries or funding welfare programs without corresponding investments in productivity—this can exacerbate long-term financial instability. The immediate relief may be overshadowed by the need for future borrowing, creating a cycle of dependency and escalating debt.

Debt Capacity and Fiscal Health

Mexico's current fiscal position demonstrates a nuanced understanding of debt management. Despite the historical challenges, the country has managed to maintain a relatively high debt capacity, as recognized by rating agencies that assign low-risk ratings to government debt securities. This positive assessment reflects a broader confidence in Mexico’s economic management and its ability to service debt responsibly.

Debt capacity, however, is not a static measure. It is influenced by a variety of factors, including economic growth, tax collection efficiency, and the overall fiscal strategy of the government. Effective debt management requires a delicate balance: leveraging debt to fund growth-enhancing investments while avoiding the pitfalls of excessive borrowing for recurrent expenditures.

Mexico’s approach reflects a sophisticated understanding of the interplay between debt and economic development. The government’s focus on improving tax collection, addressing the informal economy, and investing in infrastructure is indicative of a strategic effort to harness debt as a tool for sustainable growth. By prioritizing investments that yield long-term benefits, Mexico aims to ensure that its debt not only supports current needs but also contributes to a stronger, more resilient economy.

The Gatekeepers of Financial Credibility

In the vast and often perplexing world of global finance, few institutions wield as much power and influence as rating agencies. These enigmatic entities, shrouded in an air of authority and mystique, possess the ability to make or break economies with the stroke of a pen—or, more accurately, the tap of a keyboard. But what exactly are these rating agencies, and how did they come to occupy such a commanding position on the world stage? To unravel this, we must dive deep into the inner workings of these financial juggernauts and explore their complex relationship with the economies they rate.

At their core, rating agencies are financial institutions tasked with evaluating the creditworthiness of debt securities issued by countries, corporations, and other entities. These evaluations, typically expressed in the form of ratings, serve as a barometer of the issuer's financial health and its ability to meet its debt obligations. The higher the rating, the lower the perceived risk, and vice versa. Investors rely on these ratings to make informed decisions about where to park their money, while issuers covet high ratings to attract investment at favorable rates.

However, the power of rating agencies extends far beyond mere evaluations. They are often seen as the final arbiters of financial truth, their assessments carrying an almost divine weight in the corridors of global finance. Governments and corporations alike vie for their approval, aware that a favorable rating can unlock access to capital markets, while a downgrade can send borrowing costs soaring and investor confidence plummeting.

The Risk-Return Equation

The rating process itself is both an art and a science. Agencies like Moody's, Standard & Poor's, and Fitch analyze a wide range of factors, from economic indicators and fiscal policies to political stability and historical payment records. They then distill this complex array of data into a single rating, typically expressed as a letter grade (AAA, BB, etc.). This rating serves as a shorthand for the perceived risk associated with a particular debt security.

To understand the power wielded by rating agencies, one must grasp the fundamental relationship between risk and return in financial markets. When a government or corporation issues debt, it does so with the promise of repaying the principal along with periodic interest payments, known as yields. The level of yield offered is directly tied to the perceived risk of default. If investors believe that the issuer is highly likely to honor its obligations, the yield can be relatively low, as the investment is seen as safe. Conversely, if the issuer is perceived as risky, the yield must be higher to compensate investors for the increased likelihood of default.

Here’s where rating agencies come into play. Their ratings serve as a proxy for the risk associated with a particular debt security. A high rating suggests low risk, leading to lower yields, while a low rating indicates higher risk, necessitating higher yields. In extreme cases, when the risk is deemed particularly high, the debt may be classified as "junk bonds," a term that conjures images of financial peril and speculative investments.

The Influence of Ratings

For Mexico, the stakes are especially high. As the 13th largest economy in the world, Mexico occupies a critical position in the global financial landscape. Its geographical location, abundant natural resources, and robust production capabilities make it a key player on the international stage. But perhaps even more important is its track record of meeting debt obligations, a factor that lends it the moral solvency necessary to command respect in the markets.

In the wake of the COVID-19 pandemic, governments around the world found themselves at a fiscal crossroads. Faced with the dual challenges of plummeting revenues and soaring expenditures, many nations turned to debt as a lifeline. Public debt ratios surged as countries borrowed heavily to fund stimulus packages and support struggling economies. In this climate, Mexico's decision to forgo additional borrowing and instead draw on its own savings was a bold, albeit controversial, move.

Critics lambasted the Mexican government for what they saw as a missed opportunity to shore up the economy through increased spending. Yet, with the benefit of hindsight, this strategy appears to have been a masterstroke. By resisting the global trend toward ballooning debt, Mexico has preserved its fiscal stability, maintaining a debt-to-GDP ratio that remains sustainable. This restraint has not gone unnoticed by the rating agencies, which continue to assign Mexico a relatively solid rating, reflecting confidence in its ability to manage its debt responsibly.

This cautious approach to debt management underscores a broader philosophy: that debt, while a useful tool, must be wielded with care. The temptation to borrow in times of crisis is strong, but the long-term consequences of excessive debt can be dire. By opting to live within its means, Mexico has positioned itself as a model of fiscal prudence in a world awash with debt.

The Power of Rating Agencies

But why do rating agencies hold such sway over the fortunes of nations? Part of the answer lies in their perceived impartiality and expertise. These agencies are seen as neutral observers, armed with vast amounts of data and sophisticated analytical tools that allow them to render judgments that are beyond the capabilities of individual investors or even governments. This aura of infallibility has given them an almost unquestioned authority in financial matters.

Yet, this power is not without controversy. Critics argue that rating agencies operate with a troubling degree of self-sufficiency, as their assessments are often shaped by the very market forces they are supposed to evaluate objectively. Moreover, the consensus of the powerful—governments, banks, and corporations—often plays a role in shaping ratings, leading to accusations of bias and conflicts of interest.

Despite these criticisms, the influence of rating agencies shows no signs of waning. Their assessments continue to guide investment decisions, shape economic policies, and even influence the course of political events. In a world where financial credibility is paramount, the judgments of rating agencies remain one of the most potent forces in the global economy.

Who Watches the Watchers?

In the complex world of international finance, rating agencies serve as the gatekeepers of credibility, wielding significant influence over the economic fortunes of nations. However, this raises a critical question: who endorses these financial authorities, and how reliable are their assessments? As we explore the complex dynamics of their authority, it becomes evident that the power of rating agencies is both formidable and fraught with ambiguities.

At first glance, one might assume that the assessments provided by rating agencies are purely objective, based on the cold, hard data of economic performance. However, as Rosalío Luis Rangel Granados, an esteemed economist, points out, the reality is far more nuanced. Rating agencies operate on a dual foundation: one part subjective perception, the other technical analysis. The subjective aspect is where things become particularly unclear.

For example, consider the cases of Venezuela or Greece during their 2014 financial crisis. These nations were harshly judged by rating agencies, not solely for their economic missteps, but for failing to align with what these agencies deemed "appropriate" behavior. For instance, Venezuela has long been penalized in the eyes of the international financial community, not only for its economic policies but also for political decisions that diverge from the preferred script. The same occurred with Greece when it defied the austerity measures dictated by its creditors.

The Illusion of Objectivity

This subjective lens is a powerful tool, enabling rating agencies to enforce a certain economic orthodoxy. Countries that deviate too far from this orthodoxy find themselves downgraded, with restricted access to international markets and inflated borrowing costs. In this way, rating agencies do more than just observe—they actively shape the behavior of nations, nudging them toward policies that align with the prevailing global economic order.

Yet, this power is wielded with little transparency. The subjective nature of these assessments means that speculation and perception can weigh heavily on a country's rating. For instance, concerns about whether a government will uphold private property rights or the rule of law can lead to downgrades, even in the absence of concrete evidence. In this way, rating agencies can become instruments of financial speculation, reacting to fears and rumors rather than objective realities.

While the subjective nature of ratings casts a long shadow, the technical side of their assessments is equally significant. Agencies like Fitch, Moody's, and Standard & Poor's employ complex methodologies that draw on a wide array of indicators—economic, social, and political. These indicators include GDP growth, inflation rates, levels of exports and consumption, poverty rates, social inequality, political stability, and more. The process appears highly scientific, almost algorithmic, as these indicators are crunched into ratings that ostensibly reflect a nation's financial health.

A Thin Veil of Precision

But even this technical process is not immune to bias. As Rangel Granados notes, the indicators themselves are often colored by ideological assumptions. For instance, the rating agencies might penalize countries like Cuba or Venezuela for their political systems, which they categorize as dictatorial, without fully considering the impact of external factors like economic blockades. This introduces a subtle but powerful bias into the ostensibly objective process, where the political ideologies of the rating agencies—and by extension, the powerful countries that influence them—seep into what should be neutral assessments.

The result is a curious blend of technical rigor and ideological influence, where data-driven evaluations are imbued with subjective criteria. The agencies present their findings as impartial, yet they are inextricably linked to the broader geopolitical and economic interests that dominate global markets.

Despite these complexities, rating agencies maintain their status as the de facto authorities on creditworthiness. Their power is underpinned not just by their methodologies, but by the consensus of the international financial elite—investors, business leaders, and politicians who operate within a shared framework of values and expectations. This consensus is self-reinforcing: the agencies' ratings are trusted because they are backed by the most influential players in the financial world, and those players continue to trust the ratings because they align with their interests.

In this way, the power of rating agencies is both self-sustaining and largely unchallenged. They are the dominant voices in the global financial conversation, setting the terms by which nations are judged and shaping the flow of capital across borders. Their authority is rarely questioned, in part because there is no alternative—no competing institution with the same reach, expertise, or perceived legitimacy.

The Importance of Debt Management

In the complex arena of public finance, debt is often portrayed as the boogeyman lurking in the shadows, ready to pounce at the first sign of economic frailty. Yet, the true dimension of a nation's debt is rarely as black and white as it seems. In Mexico's case, the narrative around its debt situation is a cocktail of fiscal prudence, political maneuvering, and economic hopefulness. But what does this really mean for the country? Is Mexico teetering on the edge of a financial cliff, or is it simply navigating the inevitable turbulence that comes with ambitious development?

Debt, in its essence, is neither inherently good nor bad. It is a tool—one that can build or destroy depending on how it's wielded. Mexico's current debt situation, as described by financial experts, is not the dire, looming catastrophe that some may fear. Instead, it represents a calculated risk, one that is integral to the country's broader economic strategy. The real question is not whether Mexico should have debt, but whether that debt is being used wisely.

Imagine Mexico's debt as a giant seesaw. On one side, you have the potential for better income distribution, higher salaries, and increased investment in critical sectors. On the other side, there’s the weight of obligations—interest payments, principal repayments, and the ever-present need to maintain investor confidence. The goal is to keep the seesaw balanced, or at least tilted in a way that favors long-term growth over short-term gain.

Numbers vs. Narrative

As things stand, Mexico's debt is not a ticking time bomb, but a manageable challenge. The debt levels authorized for this year, and those projected for the coming years, are within the limits set by the Budget and Fiscal Responsibility Law. This law mandates the Ministry of Finance to present five-year macroeconomic scenarios, with the expectation that by 2025, the fiscal deficit will be reduced to around 3 or 3.5 percent. This is the government's balancing act—trying to sustain the country's development while keeping the debt-to-GDP ratio within reasonable bounds.

But where there's debt, there's debate. The discussion around Mexico's debt is not just a matter of economic calculations; it's also a battlefield of political ideologies. On one side, there are those who believe in the current government's approach—investing heavily in infrastructure and social programs, with the hope that these investments will pay off in the long run. On the other, there are skeptics who argue that this strategy is overly optimistic and may leave the country more vulnerable in the future.

This ideological clash isn't just about numbers; it's about the narrative each side wants to promote. Critics of the government's debt strategy argue that reducing the fiscal deficit to 3 percent by 2025 is unrealistic, especially given the scale of the infrastructure projects currently underway. They caution that if these projects do not deliver the expected economic returns, Mexico could find itself in a tighter fiscal bind, with less room to maneuver in future crises.

Supporters, however, argue that these projects are essential for the country's long-term growth. They see the current debt levels as a necessary investment in Mexico's future—a bet that the country will be able to generate enough economic activity to not only pay off its debts but to lift millions out of poverty and inequality. From this perspective, the debt is not a burden, but a catalyst for transformation.

The Optimist's Gamble

In the end, the debate about Mexico's debt boils down to a simple question: Do you believe in the country's future or not? For those who are optimistic, the current debt levels are a calculated risk worth taking. They argue that betting on the success of major infrastructure projects—such as the Mayan Train, the Dos Bocas refinery, and the Felipe Ángeles International Airport—is not just a financial decision, but a commitment to the country's long-term prosperity.

This optimism is not without its risks. Infrastructure projects of this scale are notoriously difficult to execute, often running over budget and behind schedule. If these projects fail to deliver, the critics will have their "I told you so" moment, and Mexico could face a much more challenging economic environment. But if they succeed, the payoff could be significant—higher GDP growth, more jobs, better wages, and a more equitable distribution of wealth.

So, what is the real dimension of Mexico's debt? It's not just a number on a balance sheet; it's a reflection of the country's hopes, fears, and ambitions. Mexico's debt is a bet on its future, one that requires careful management, clear vision, and a bit of luck. The current government has laid its cards on the table, betting that its infrastructure projects will pay off and that the country will emerge stronger and more prosperous.

But as with any gamble, there are no guarantees. The true measure of Mexico's debt will only become clear in the years to come, as the country navigates the uncertain waters of global finance and domestic development. For now, all we can do is watch, wait, and hope that this bet pays off—not just for the government's sake, but for the millions of Mexicans whose futures hang in the balance.

In-text Citation: (Bahena, 2024, pp. 26-31)