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Broad Audit of Chinese Government Agencies Set

July 28, 2013 by

HONG KONG — The National Audit Office of China said Sunday that it would conduct a broad audit of debts incurred by government agencies, in the latest sign of Beijing’s concern that heavy borrowing by local governments and their affiliates might pose a broader threat to the economy.

The audit office issued a single-sentence statement saying that it had been instructed by the State Council, or cabinet, to carry out the audit.

Western economists have estimated total local government debt in China at $2 trillion to $3 trillion and rising.

China avoided most of the effects of the recent global financial crisis through a huge program of government spending financed by debt. The stimulus program has encompassed projects ranging from a national grid of high-speed train routes to the construction of thousands of roads and bridges by municipalities, towns and villages.

In an interview last month with the Web site of People’s Daily, a deputy head of the fiscal audit section of the National Audit Office said that since last year, the outlook for the economy as a whole, and for government revenue in particular, has “not been too sunny.”

“Under these circumstances, how to avert financial risks is quite an urgent issue, said the official, Ma Xiaofang.

Those concerns have already prompted the office to audit 36 local governments this year, following a similar check in 2011, Mr. Ma said. “We must have more insight into problems, risks and hazards in local government debt management,” he said.

China has made periodic efforts over the years to assess the scope of local government debt, and Sunday’s statement by the National Audit Office was too terse to be clear about how comprehensive the latest effort would be. Bankruptcy proceedings started this month by the City of Detroit have surprised and alarmed many in China, however, prompting renewed concern about the financial health of Chinese cities and towns.

While the Chinese government has considerable unused borrowing capacity at the national level as well as $3 trillion in foreign exchange reserves, any move by the central government to bail out profligate local governments would be politically contentious within China.

Using the foreign exchange reserves to cover local government debts would also be extremely difficult for practical reasons. The central bank has financed those reserves mostly by borrowing money from Chinese commercial banks and needs to be able to repay these banks.

Beijing imposes many restrictions on the ability of local governments to borrow at all. But local governments have been widely sidestepping these restrictions by setting up special financing entities that borrow the money for them.

Many local governments also own businesses and have used their political connections to help these businesses obtain loans from state-owned banks. This has further increased possible financial liabilities for the local governments themselves.

These governments’ revenues tend to be heavily dependent on the sale to developers of long-term leases for government land, which is then used for building apartment towers, factories, shopping malls and other projects.

Developers’ interest in these leases tends to be highly cyclical, soaring when the real estate market is strong and crashing when real estate prices fall. With Beijing trying to improve the affordability of housing for the past couple years by limiting real estate speculation, developers have been more cautious about acquiring further leases.

Many local governments have also guaranteed loans to borrowers in politically favored sectors like solar panel manufacturing. That allows the borrowers to obtain loans at extremely low interest rates. But the local governments are then exposed to huge losses if the borrowers default — a constant risk given the overcapacity and declining profit margins that bedevil many Chinese industries.

“These problems must attract serious attention, and there should be effective measures taken to strengthen management of local government debt,” Mr. Ma said.

Article source: http://www.nytimes.com/2013/07/29/business/global/broad-audit-of-chinese-government-agencies-set.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Today’s Economist: Nancy Folbre: Mortgaged Diplomas

June 3, 2013 by Leave a Comment

Nancy Folbre, economist at the University of Massachusetts, Amherst.

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Current and prospective college students are receiving real-world instruction in the dismal political economy of public finance.

Today’s Economist

Perspectives from expert contributors.

Unless Congress can overcome its partisan differences, interest rates on federally guaranteed Stafford loans, an important means of paying for college, will double to 6.8 percent in July.

With the Bank on Students Loan Fairness Act, Senator Elizabeth Warren, Democrat of Massachusetts, proposes to reduce this interest rate to the same level that large banks pay for loans from the Federal Reserve Bank — 0.75 percent — for at least one year, during which longer-term remedies could be explored.

The bill, one of many aimed at addressing the scheduled interest-rate increase, seems unlikely to win passage. But it highlights the double standard that puts the interests of banks and other businesses well ahead of those of students and ordinary people when it comes to debt relief.

As Robert Kuttner explains (both in The New York Review of Books and in his new book “Debtors’ Prison”), bailouts and bankruptcy proceedings both provide a means for businesses to get out from under bad debt. The obligations of a college loan, by contrast, “follow a borrower to the grave.”

The rolling thunder of accumulating student debt sounds a lot like the perfect storm of mortgage liabilities that threatened major financial institutions and precipitated the Great Recession in 2007.

According to a recent study by the Federal Reserve Bank of New York (nicely summarized in a publication by the Federal Reserve Bank of St. Louis), the dollar value of college loan debt in the United States now surpasses both auto loan and credit card debt.

As states have steadily reduced their support for public higher education, tuition and fees have increased far more rapidly than the rate of inflation. Slow economic growth and persistently high unemployment rates have made it harder for parents to help with tuition bills, while students feel increasing pressure to gain a credential that could improve their job market chances.

The number of student borrowers increased 54 percent from 2005 to 2012, while the average debt per borrower increased 56 percent, to $25,000.

Whether or not you call it a bubble, evidence shows something is likely to pop.

Both delinquency and default rates have increased substantially since 2005. According to the Institute for Higher Education Policy, only a little more than a third of 1.8 million borrowers who entered repayment in 2005 repaid their student loans successfully without delay or delinquency for the first five years.

Low-income minority students, disproportionately likely to attend for-profit schools, are the most vulnerable.

Like the tranches of mortgage securities that were labeled “sub-prime,” their federally guaranteed loans, often arranged by for-profit schools positioned to cash in on them, are the least likely to be repaid.

The New York Fed study reports that students at private, for-profit colleges account for nearly half of all student loan defaults, though they represent only 10 percent of total enrollment.

In a speech titled “Subprime Goes to College,” Steve Eisman, one of the few major investors to anticipate and profit from the earlier mortgage crisis, has drawn explicit parallels between loan-peddling in both realms.

In both cases, federal and state regulation was weak. Yet regulatory tools clearly work. Default rates on college loans declined sharply in the early 1990s, after federal policy makers began penalizing for-profit colleges with default rates greater than 25 percent.

More recent efforts to impose higher loan-repayment standards on colleges have run into legal obstacles.

Meanwhile, many students, like older family members who found themselves underwater on home mortgages, don’t fully understand the complex process of loan renegotiation. The new Consumer Financial Protection Bureau, a hard-won political response to the mortgage crisis, has noted that students who feel confused about the terms of their loan are particularly likely to default. The National Consumer Law Center offers a detailed policy agenda for reducing default rates.

The Obama administration has put in place an important income-based repayment system that could considerably alleviate stress for many student borrowers by limiting the amount they pay monthly to a fixed percentage of their income. Yet the details are complicated, and some students may fear the prospect of paying a larger total amount of interest if they spread their payments out over time.

Like mortgage debt, which discouraged many homeowners from either selling their homes or buying new ones, student loan debt has knock-on effects, making it harder for young people to buy cars or homes.

The reduction in major purchases by the younger generation slows economic growth and contributes to persistently high unemployment and underemployment rates that leave some college graduates with no recourse but default.

High default rates in turn, raise the cost of the loans, fueling the conservative argument that interest rates on them should be set much higher than those on loans to banks.

Of course, loans to large banks are more secure in part because they are bailed out when they get into temporary trouble. My students wish that they, too, were too big to fail.

Article source: http://economix.blogs.nytimes.com/2013/06/03/mortgaged-diplomas/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

DealBook: Delta and TPG Said to Weigh Bids for American Airlines

January 13, 2012 by Leave a Comment

The American Airlines baggage area at O'Hare Airport in Chicago.Scott Olson/Getty ImagesThe American Airlines baggage area at O’Hare Airport in Chicago.

9:05 p.m. | Updated

As American Airlines trudges through its bankruptcy proceedings, potential suitors are coming out of the woodwork.

Delta Air Lines and TPG Capital, the private equity firm, are considering separate bids for AMR Corporation, American’s parent company, according to two people briefed on the matter.

Delta has hired the Blackstone Group and is weighing a potential bid, according to a person briefed on the matter who was not authorized to speak about it publicly. Blackstone advised Delta in that airline’s own bankruptcy and on its merger with Northwest Airlines.

TPG is also taking a look, according to a person briefed on the matter. TPG is no stranger to airlines, having invested in Continental and Midwest Air and having made an unsuccessful bid for Qantas of Australia alongside the investment bank Macquarie. The firm also worked with AMR on a proposed investment in Japan Airlines that was eventually rejected.

US Airways is also reportedly considering a bid, according to Bloomberg News, which cited a person familiar with the process.

American’s restructuring is still in its early days. The company has yet to outline its plan to the bankruptcy court. It is expected to formally present a new strategy in the next few months. The company, among other things, seeks to reduce its costs by renegotiating contracts with its labor groups.

A purchase of American Airlines would have to be reviewed by the creditors’ committee and approved by a judge.

American, meanwhile, signaled on Thursday it was “not necessarily” looking to terminate its pension plan although that option was on the table. The company has been coming under increasing pressure from some of its labor groups as well as the Pension Benefit Guaranty Corporation in recent days to rapidly state what it planned to do with its employee pension plan.

American has argued that its pension plan, which is underfunded, was very expensive, and that it spent more than other airlines do. However, the PBGC pointed out in a statement on Thursday that Delta paid an average of $13,210 per employee in pension costs, almost two-thirds more than American’s prebankruptcy cost of $8,102.

Some airlines, like United Airlines, that have gone through bankruptcy restructuring in the past decade have terminated their pension plans for some of their labor groups. But not everyone did. Delta terminated its pension plan for pilots but not for other labor groups, like flight attendants. Northwest Airlines kept its plan going after its bankruptcy.

“American should have to prove in court that this drastic step is necessary,” said Joshua Gotbaum, the pension benefits agency director.

The interest in American Airlines was reported earlier by The Wall Street Journal. A bid from Delta, which would create the top carrier in the country, would draw intense scrutiny from the Justice Department and might have trouble being approved without significant concessions.

Article source: http://feeds.nytimes.com/click.phdo?i=f91dcdf765160d58e3aa389014951d7c

Filed Under: Business News Tagged With: , ,

Overbuilding in Spain Leaves Many White Elephants

June 24, 2011 by Leave a Comment

To justify the grand opening, Carlos Fabra, the head of Castellón’s provincial government, argued that it was a unique opportunity to turn an airport into a tourist attraction, giving visitors full access to the runway and other areas normally off limits. This Sunday, it will be used as the starting point for part of Spain’s national cycling championships, featuring the three-time Tour de France champion Alberto Contador.

Castellón Airport, built at a cost of €150 million, or $213 million, is not the only white elephant that now dots Spain’s infrastructure landscape. Spain’s first privately held airport — in Ciudad Real in central Spain — had to enter bankruptcy proceedings a year ago because of a similar lack of traffic.

Across the country, nearly empty toll roads are struggling to turn a profit. Other projects are surviving only with continued public financing, which has been cast into doubt by Europe’s sovereign debt crisis.

Over the past 18 months, Spain has been in investors’ line of fire after allowing its budget deficit to balloon during a long real estate bubble, which finally burst alongside the worldwide financial crisis. To clean up the mess, the Socialist government of José Luis Rodríguez Zapatero introduced austerity measures last year that, among other things, shrank spending on infrastructure. And that has left some projects in limbo, despite political pledges to keep them alive.

Over the past two decades, Spain built transport networks at a rate that few other European countries came close to.

Having opened its first high-speed train connection between Madrid and Seville in 1992, Spain overtook France last December as the country operating Europe’s biggest high-speed rail network, covering just over 2,000 kilometers, or 1,200 miles.

Growth in road and air transport has been just as spectacular. From 1999 to 2009, Spain added over 5,000 kilometers of highways — the biggest road construction endeavor in Europe. And its 43 international airports handle more cross-border passengers than any other country in Europe.

Such expansion has been a source of intense national pride. It has also brought major economic benefits to some previously isolated and impoverished regions.

Yet like Castellón Airport, not all the projects were necessarily well thought out. Some experts suggest that Spain’s approach to development during the boom years had placed speed ahead of risk assessment.

Joseph Santo, logistics and transportation director in the Iberian subsidiary of the consulting firm Booz Co., said there were differences between Spain and Britain, for example, when it comes to forming so-called public-private partnerships in the transport sector.

“In the U.K, they try to get everything into the agreement ahead of time and think of every contingency, so that it can take years to negotiate the deal,” Mr. Santos said. “In Spain, they do the reverse. They make the deal in six months and then if something comes up, they see how they can fix it.”

In separate interviews, the heads of some of Spain’s largest construction and infrastructure management companies conceded that spending had gotten out of control before the crisis. But they also predicted that most building projects, particularly in transport, would eventually yield profits.

“The problem is that such projects are generally conceived at a time when everything seems bound to succeed — even sometimes badly conceived projects — and there were no doubt some planning problems,” said Salvador Alemany, the chairman of Abertis, which is based in Barcelona. “At the same time, such projects have to live with the realities of an economic cycle that brings lows as well as highs, and there are plenty of examples of highways around the world that had difficult takeoffs.”

Baldomero Falcones, chairman and chief executive of FCC, another builder, recalled the painful opening of toll roads in the region of Catalonia in the 1970s — roads that have recently required expansion to cope with soaring traffic.

“I have never seen any transport infrastructure that at the end of the day has not proved profitable,” he said.

Article source: http://feeds.nytimes.com/click.phdo?i=38c5c770e85945e95597356145254a37

Filed Under: Business News Tagged With: , ,