February 12, 2013 / 11:56 PM / in 5 years

Mexico ruling party offers light touch on growing state debt

* Bill would create voluntary system to rein in state debt

* Opposition demanding lawmakers set debt limits

* Debate on bill may set tone for coming economic reforms

By Michael O‘Boyle

MEXICO CITY, Feb 12 (Reuters) - Mexico’s ruling party on Tuesday submitted a bill to limit the growth of state debt through a voluntary framework that falls short of opposition demands for direct regulation by the Senate.

Senators from President Enrique Pena Nieto’s Institutional Revolutionary Party, or PRI, propose allowing the finance ministry to guarantee state debt but only when local governments meet certain criteria - stopping short of imposing absolute limits on debt levels.

Opposition lawmakers have submitted bills that would empower the Senate to set debt limits for individual states. The PRI bill would instead encourage governments to meet standards that could help them obtain lower financing costs in debt markets.

“This creates incentives for financial discipline, and these incentives would imply their own rewards and punishments,” said PRI Sen. Manuel Cavazos, one of the party’s experts on financial issues.

Pena Nieto aims to push an ambitious raft of major economic reforms through a divided Congress during his first year in office. Although the state debt debate is not seen to be as important as expected fiscal and energy reforms, it could set the tone for future discussions.

Some Mexican states have seen their debt balloon in recent years but official figures often understate the total. Still, state and local government debt remains relatively small for the size of Latin America’s second-biggest economy.

Last month, Finance Minister Luis Videgaray said the government would submit a bill in February to rein in excessive borrowing by states and municipalities.

After opposition lawmakers pushed their own bills, PRI senators submitted their proposal, under the guidance of the finance ministry, lawmakers said.

Overall state and local government debt is less than 3 percent of Mexico’s gross domestic product, but some states owe more than double their annual federal government transfers, their main source of income.

The PRI proposal would seek to keep total local and state debt below 3 percent of GDP and the finance ministry would only guarantee debts that are below 75 percent of the state’s income.

Senators from the conservative National Action Party (PAN), which held the presidency for 12 years until last December, submitted their own bill on Tuesday that would give the Senate oversight of state debts and let lawmakers set limits every year. The left-wing Party of the Democratic Revolution (PRD) submitted a similar bill last month.

The PRI controls roughly two-thirds of local and state governments and opposition lawmakers said the administration is unwilling to impose tough restrictions on an important support base.

“They want to turn back the clock to before reforms in 2000, when the finance ministry had the power and control,” said PRD Sen. Armando Rios Piter, who wrote the PRD bill.

“We can not accept that the finance ministry becomes an all-powerful agency again,” he said.

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