# Ortiz on governance, risk and Mexico's progress

The Bank of Mexico governor and BIS chairman discusses central bank governance, monitoring systemic risk and why Mexico has managed to avoid a financial meltdown despite being hard hit by the crisis

Central Banking (CB): The international central banking community widely regards your 11 years at the helm of Banco de Mexico as a success. What do you consider your greatest achievement during this period?

Guillermo Ortiz (GO): We have made a lot of progress in terms of financial stability in Mexico. The current crisis has hit Mexico particularly badly because of a number of factors. But given the severity of this shock, that Mexico is not suffering from a financial crisis is testament to the resilience of the economy and financial sector.

CB: And how has the central bank contributed to this?

GO: The one very important point is the framework of monetary policy. We adopted inflation targeting many years ago and a flexible exchange rate system. One of the many vulnerabilities that had caused crises in the past, the fixed exchange rate, was removed.

Again the combination of inflation targeting and flexible exchange rates has given the central bank freedom in the operation of monetary policy. And this has also contributed to the deepening of financial markets and the developments of capital markets.

During the last Mexican crisis in 1995, the Mexican government could not place paper in the market for more than three months. The yield curve was expanded to one year, five, ten, 20 and then 30 years. So the anchoring of inflation expectations and the monetary policy framework has helped to increase the resilience of the financial sector to real shocks in the economy.

CB: Do you think the current crisis represents your toughest challenge yet?

GO: It's hard to say. 1995 was a very difficult time but 95 was a crisis of our own making. And in many ways, the 1995 crisis was more difficult to deal with because it was accompanied by the threat of default, high inflation, high interest rates, a fall in real wages. This crisis, although perhaps more severe in terms of the contraction of economic activity has not been accompanied by financial upheaval. We have in fact been able to reduce interest rates. And we have a high level of international reserves and this buffer has been very helpful in stabilising financial markets even during the most difficult period of the current crisis.

CB: How helpful do you think the currency swap with the Fed and the IMF credit line have been in tempering market volatility?

GO: Both helped in the stabilisation of financial markets. We had some difficult months after the collapse of Lehman Brothers, like many emerging markets. In the case of Mexico, as well a number of countries such as Brazil and Korea, a number of firms engaged in derivatives that implied large losses and put a lot of volatility in the foreign-exchange markets. Additional buffers that were provided by the Fed and the IMF were an important part of reducing volatility in the foreign-exchange markets.

CB: Without them would Mexico have been able to go it alone?

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