By Krista Hughes and Michael O'Boyle
MEXICO CITY (Reuters) - Mexico is in a better position now to deal with a global crisis than in 2008 given record international reserves and a more solid private sector, central bank governor Agustin Carstens said on Monday.
Even as investors pushed risk premiums on Spanish debt to their highest levels since the launch of the euro, Carstens said he had faith in the efforts euro zone countries were making to prevent contagion from Greece's woes.
Fallout for Latin America's No. 2 economy, one of the worst affected during the last global financial crisis, should therefore be moderate, he said, downplaying the risks from the Spanish banks which dominate Mexico's financial sector.
"Mexico is quite resistant," Carstens said at the Reuters Latin America Investment Summit. "I really think we are in a position of strength."
Mexico, with its close ties to the United States, suffered one of the biggest hits among emerging market economies after the collapse of investment bank Lehman Brothers in late 2008, contracting by more than 6 percent in 2009.
Although U.S. growth has been resilient so far, experts worry that a fresh global crisis would inevitably drag down the world's biggest economy, and Mexico along with it.
Mexico is one of several Latin American countries with a higher budget deficit and more net debt compared to five years ago and the United Nations regional economic body, ECLAC, warned there was limited fiscal room to maneuver in the event of a fresh crisis.
"A disorderly exit (of Greece) could have more negative consequences than what happened with Lehman Brothers, and that scenario cannot be ruled out," said ECLAC head Alicia Barcena.
Carstens said the chances that Europe's debt woes could spark another global financial crisis were growing "at the margin" but that it was still a "relatively low possibility."
Carstens, who was finance minister at the time of the financial crisis, said Mexico now enjoyed deeper pockets, with international reserves worth $155 billion, and the protection of a flexible credit line with the International Monetary Fund.
Unlike in 2009, Mexico is not struggling with either a swine flu epidemic or risky derivatives bets by private companies, such as the soured currency wagers that nearly drove cement maker Cemex (CMXCPO.MX) into bankruptcy, he said.
But as in 2009, a high share of credit originates with Spanish banks, such as BBVA (BBVA.MC) and Santander (SAN.MC), whose weakness could force Spain to seek an international bailout. Lending by euro-area banks in Mexico fell 14 percent in 2008 and Bank for International Settlements data show they account for more than 35 percent of Mexican credit.
"At the moment I would say that foreign-owned Mexican institutions are strong, they are well-capitalized, they don't have a problem with bad loans," Carstens said.
"There are no imbalances which would be a cause for concern on the part of Mexican authorities."
Carstens said the slump in the peso, which has lost about 10 percent against the dollar since mid-March, was out of line with the solid fundamentals of the Mexican economy.
PESO TO REBOUND
Growth in early 2012 beat expectations on the back of strong U.S. demand for manufacturing exports, fanning optimism that the economy will grow close to 4 percent this year.
Mexican inflation accelerated in early May to 3.71 percent and analysts think that the threat that a sharply weaker peso could push consumer prices higher will likely keep the central bank from cutting interest rates from the current 4.5 percent this year.
Carstens said the peso's weakness should be temporary and will not have a "big inflationary impact" since the currency will likely bounce back from current levels before companies pass on higher import costs to consumers.
"At the moment the peso is at these levels precisely because there is this fear that something undesirable could happen in Europe, but the truth is that to the degree that these fears dissipate and the Mexican economy demonstrates that it can successfully navigate these periods of volatility, I would expect that this will lead to a peso correction," he said.
Unlike in 2008, when the peso fell to its lowest level in 16 years, Mexico has so far refrained from ad-hoc currency intervention but last week auctioned dollars using a process triggered automatically by sharp peso drops.
Carstens said he was satisfied with the auction system and thought it was adequate to guarantee liquidity in the peso market, one of the most liquid in emerging markets.
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(Additional reporting by Ana Isabel Martinez and Luis Rojas in Mexico City; editing by Matthew Lewis and Todd Eastham)