Since the onset of the credit crisis several events have highlighted just how little a rating reflects market reality. Brazil’s and Mexico’s credit default swap spreads are a case in point. Since January, Mexico’s five-year CDS have been trading wider than Brazil’s, even though Mexico is rated BBB+ by Standard & Poor’s, two notches higher than Brazil’s BBB–.
In normal times, Mexico’s fundamentals stand out from Brazil’s. Mexico has a higher GDP per capita ($14,200 compared with $10,100), a more open economy (55% compared with 24% exports plus imports as a proportion of GDP) and lower public-sector indebtedness. Mexico has better trade policies, more developed institutions, higher savings rates and lower interest rates. These factors help support S&P’s position and explain why Brazil’s five-year CDS spreads traded at more than double Mexico’s two years ago.
But in late 2008 the FX derivatives crisis hit Mexican companies, nearly taking out jewels such as Vitro and Comerci. Cemex has hit the rocks too as its over-ambitious acquisition programme in 2006 and 2007 caught up with it. In March, the Mexican peso fell to historically low levels against the dollar as capital inflows fell and interest rates were slashed.