Cablegate: Bank Governor Appointment Sparks Cabinet Reshuffle

DE RUEHME #3486/01 3451342
P 111342Z DEC 09




E.O. 12958: N/A


1. Summary. (U) On December 9, President Calderon nominated Finance
Secretary Agustin Carstens as the country's new central bank
governor (Banxico). Carstens, whose nomination still needs to be
ratified by the Senate, will replace Guillermo Ortiz who finishes
his second six-year term at the end of 2009. Taking Carsten's place
as Finance Secretary (Hacienda) is the Secretary of Social
Development (SEDESOL) and Calderon's close associate Ernesto
Cordero. Heriberto Felix, former Under Secretary for Small and
Medium Enterprises (SMEs) in the Secretariat of the Economy,
replaces Cordero at SEDESOL. Following the news, the stock market
was down 0.2% from the day before and the peso was down 0.3%. Most
analysts attribute this reaction to the market's skittishness over
Cordero's new position at Hacienda, as as well as some concern over
the autonomy of the central bank under Carstens. End Summary.

Banxico Governor: Carstens to Replace Ortiz

2.(U) After considerable uncertainty, President Calderon nominated
Finance Secretary Agustin Carstens as the country's central bank
governor on December 9. Carstens will replace Guillermo Ortiz who
finishes his second six-year term as governor at the end of this
year. Since becoming autonomous in 1994, the Bank of Mexico
(Banxico) has strengthened its economic policy-making role and
credibility. The president appoints the BOM's governor, with Senate
confirmation, for a six-year period, with no term limits. The
appointment is timed deliberately at the mid-point of the government
to avoid electoral pressure. The president cannot remove the

3.(U) Carstens holds a doctorate in economics from the University
of Chicago and an undergraduate degree from the Mexico City-based
Autonomous Technological Institute of Mexico (ITAM). Carstens is not
new to Banxico. He joined the Bank in 1982 after completing his
economics degree. He completed his doctorate at the University of
Chicago on a Banxico scholarship. Within the BOM he occupied top
positions such as treasurer, head of economic research, and chief of
the governor's cabinet. As the BOM's chief economist, Carstens was
a key player at the BOM during its most difficult era, helping
Mexico to mitigate the effects of the 1995 peso crisis, when soaring
interest rates caused defaults on loans and put banks on the verge
of collapse. According to chief economist at JP Morgan Chase
Gabriel Casillas, Carstens also formed plans in the late 1990s to
create the rainy-day oil fund and to hedge oil exports, strategies
that were first implemented early this decade. Before returning to
Mexico to become Calderon's Finance Secretary following Calderon's
2006 election, Carstens was Deputy Management Director at the IMF
and prior to that he was Undersecretary of Finance under Francisco
Gil Diaz during the Fox Administration (2000-2006).

4. (SBU) While Carstens performed generally well at the Finance
Secretariat in recent months, particularly his work on the 2010
budget, his domestic prestige was damaged early on when he forecast
that the U.S. crisis would have little impact on Mexico. Instead,
the crisis caused GDP to contract by about 7% this year.
Nonetheless, Carstens leaves Hacienda on a high note, announcing on
December 8 that the GOM had hedged the 2010 Mexican oil price at
US$57 per barrel, almost the same as what was approved in the
budget. A similar 2009 hedge averted a more serious budgetary
crisis. Carstens recently expressed confidence that sustainable
fiscal accounts would mean Standard & Poor's would not downgrade
Mexico's sovereign rating, despite a negative outlook since May --
Fitch Ratings last month cut the rating one notch to BBB. He also
led efforts this year to win approval for the tax increases aimed at
offsetting falling oil revenue. If ratified as Banxico governor, he
will guide policies amid inflationary pressures from those tax
increases he proposed and an economy recovering from recession. At
a press conference yesterday, Carstens said his mandate will be to
promote a stable peso. He said "My commitment will be to make sure
that this constitutional mandate is carried out faithfully.".

5. (SBU) The media reported pressure in recent weeks for Calderon to
reappoint the departing governor, Guillermo Ortiz -- in the post
since 1998. Observers noted that Ortiz's performance was excellent,
and that change during a financial crisis was inadvisable.
Nonetheless, Ortiz will end on a high, with inflation within
Banxico's 2-4% target range, and the peso stabilizing in recent
months. According to BOM information released December 9,
twelve-month inflation in November reached 3.86% -- its lowest since
March 2008. However, Calderon and Ortiz have had a tense

MEXICO 00003486 002 OF 003

relationship since 1999, when the former (who then led the PAN) made
the latter's resignation a condition for approving legislation
concluding the post-1995 crisis banking. Ortiz refused to step down,
arguing that Banxico was autonomous.

GOM-BOM Policy Coordination Raises Eyebrows

6. (SBU) Although analysts are supportive of Carstens'
qualifications and understanding of monetary policy, some are
concerned that the BOM will lose some of its autonomy based on
previous comments made by Carstens as well as remarks made by both
Carstens and Calderon during the December 9 press conference.
Calderon said the GOM "will work in close coordination with the Bank
of Mexico, without diminishing its complete autonomy, and in
particular in designing and putting into practice public policies of
a monetary, fiscal or currency nature." Calderon also referenced
the law when he said that as governor Carstens would be "a close and
constant adviser for the federal government's most important
decisions on economic policy." Carstens said he would continue to
fight inflation, which is the central mandate of the central bank,
"but that does not preclude that we can exploit much more
effectively opportunities to coordinate between Banxico and the
federal government on achieving broader goals." While these
remarks may signal a more accommodating monetary policy, earlier
this week Carstens said that the autonomy of the BOM was safe since
the vote of the Governor was only one of five on the Board of

Hacienda: Cordero Replaces Carstens

7. (SBU) Ernesto Cordero, the current Secretary of Social
Development, will replace Carstens as Finance Secretary. He studied
to be an actuary at ITAM and holds a Master's in Economics from the
University of Pennsylvania. Cordero's closeness to Calderon has
raised issues for many observers. Cordero has limited economic
experience in the Secretariat as Undersecretary for Expenditures
during the first year of the Calderon administration. In January
2008, he was promoted to head the Social Development Secretariat.
This short tenure at Hacienda makes him the most inexperienced
Finance Secretary since the late 1970s. Many observers speculate
that Calderon chose Cordero to groom him as a potential PAN nominee
for 2012. Comment: While serving as Finance Secretary offers him
potential to gain name recognition and wider confidence, it also
carries risk of assuming the blame for continued economic troubles.
End Comment.

8. (SBU) Econoff's conversations with contacts revealed lack of
enthusiasm over the prospect of Cordero becoming the next Finance
Secretary. Economists Ramirez de la O said he would be "a
disaster," Jonathan Heath said he would be Calderon's "yes man,"
and Luis Rubio said he wasn't a smart pick. Observers also note
that he is a close friend of Calderon's, owes his political career
to him and is virtually unknown in international financial circles.
On the other hand, others think that Cordero could be effective if
he keeps the cadre of technocrats in place, namely powerhouse
Finance Under Secretary Alejandro Werner. Comment: Cordero may
well have time to prove himself, with Congress having approved the
2010 budget, and the oil hedge providing public finances breathing
space. Nonetheless, Calderon continues to appoint close allies to
the cabinet, rewarding loyalty rather than seeking expertise,
especially in a Secretariat that was the preserve of proven
technocrats. The 'bunker mentality' that has tainted the Calderon
government for some time remains in place. This also was apparent
with Cordero's successor at Sedesol. End Comment.

Social Development: Jesus Heriberto Felix Guerra
--------------------------------------------- ----

9. (SBU) Jesus Heriberto Felix Guerra was named Secretary of Social
Development (Sedesol), replacing Cordero. He moves to Sedesol from
his position as Undersecretary of SMEs in the Economy Secretariat,
where he served since 2006. Prior to joining the federal government,
Felix Guerra served in the government of Sinaloa, first as Secretary
for Economic Development for PRI governor Juan S. Millan from 1998 -
2003 and then as senator for a short period in 2006. Felix Guerra
ran as the PAN candidate for governor of Sinaloa in 2004 and lost by
a very small margin. In 2006, shortly after winning his senatorial
race, Felix Guerra accepted the job as Undersecretary of SMEs. In

MEXICO 00003486 003 OF 003

his private life, Felix Guerra has founded and runs industrial
businesses. He holds a master's degree in economics from the
Instituto Tecnologico y Estudios Superiores de Monterrey. Comment:
His appointment comes with some criticism for lacking relevant
experience, particularly with anti-poverty programs. His
appointment may signal a presidential desire to give the Sedesol
budget and programs a more political orientation. Poverty is
increasing due to the deep recession, and Felix may struggle to
address this given his lack of familiarity with the Secretariat.
End Comment.


10. (SBU) Following the news on Calderon's appointments, the stock
market was down 0.2% from the day before and the peso was down 0.3%.
Most analysts attribute this reaction to the market's skittishness
over Cordero as new Finance Secretary, who may be seen as yet
another close personal and political associate of President
Calderon's. There are also some concerns that a central bank under
Carstens may lose some of its autonomy. Although significant market
reaction in not expected short term, it will still be important to
assess the market's reaction following the Senate's ratification of
Carstens as Banxico's new Governor. While the Senate is virtually
certain to confirm him, the markets will scrutinize his early
actions, particularly on interest rates. His views on exchange rate
policy are unclear as yet. He will probably continue intervening in
markets -- heavily if necessary -- if a sudden peso depreciation
risks increasing inflationary expectations, but will otherwise allow
the currency to float. Carstens' strong relationship with the IMF
might also facilitate activating Mexico's Flexible Credit Line with
the Fund, if there were sudden currency volatility. Overall, the
announcement of the new appointments could be positive for local
markets and other financial variables in the medium term,
particularly as the announcement removes another source of
uncertainty. End Comment.

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