Fed Picture May Clear; China to Sell Bad Debt

Receiving Wide Coverage ...

Fed in the Spotlight: All eyes will be on Janet Yellen this week as the Federal Open Market Committee meets. With the "new dot plot" expected, we should get a clearer view about whether the Fed still expects four rate hikes this year. Some Fed officials stress treading with caution, arguing risk is minimal if they move slowly. “We may well at present be seeing the first stirrings of an increase in the inflation rate,” Stanley Fischer, the Fed’s vice chairman, said last week. After the December rate hike, puindits expected the next raise would occur this week, but in the interim markets started to gyrate and it unlikely the Fed will move this week. Analysts, though, expect signals that rate increases will resume in April or June.

Meanwhile, the U.S. bond market is preparing for a rate hike. Traders as recent as last month were certain the Fed would refrain from raising the rate this year, but some arenow bracing for at least one increase before year’s end. Based on interest-rate futures last Friday, the odds of an increase by June spiked to 43% and to 75% for a hike by December, a sharp contrast to February when the market estimated no chance of a rate increase in either month. The Fed’s meeting this week comes after the Bank of Japan earlier this year adopted a negative interest rate and the European Central Bank last week cut its main rate to zero from 0.05%. New York Times, Wall Street Journal

Puerto Rico Bail Out? A movement is afoot for the United State to bail out Puerto Rico from its financial woes. The Obama administration wants what it calls a “super Chapter 9” law that allows for a broad restructuring of the commonwealth’s $70 billion debt. This, after a congressional representative of the commonwealth last July introduced a bill in the U.S. House to give the island access to chapter 9 of the U.S. bankruptcy code, on the grounds that its public corporations and municipalities shouldn’t be excluded from protections afford to similar entities in the 50 states. This idea is a good political call but bad for virtually everyone else, the Wall Street Journal opines. Whether Puerto Rico can make good on its debts is doubtful, considering that financial statements for fiscal year 2014 still don’t exist. The commonwealth is more than 300 days past the filing deadline for that year, Ricardo Rossell-, who is competing for the New Progressive Party nomination for governor, wrote in a March 1 letter to Senate Finance Committee Chairman Orrin Hatch. The Journal notes if Puerto Rico can claim bankruptcy, some states will clamor for the same privilege. The governors of some states, from New Mexico to Alabama to Maine, believe they will pay the price for such unprecedented bankruptcy authority with higher borrowing costs and eroded investor confidence. What’s needed instead, the paper says, is an independent oversight authority, an audit and the opportunity for bondholders to negotiate, putting pressure on Puerto Rico’s political class to live within its means. New York Times

Financial Times

Banks and other financial institutions in Europe continue to make changes to recruitment, training, pay and supervision to combat human error. After the crisis, the industry tried to stem a wave of operational problems largely driven by human error that included manipulation of foreign exchange rates and improper selling of retail and small business products. The effort to clean things up, spurred by regulatory pressure, has led some companies to step up training to feature general risk awareness courses and certification. Some have introduced mandatory online training that covers how staff is expected to behave toward customers and how to identify wrongdoing. Risk issues figure more prominently in recruitment interviews. Others have changed pay and reward systems that, some believe, encouraged unnecessary risk taking.

The European Union has capped bonuses at 100% of salary, or 200% with shareholder approval. For staff earning higher salaries, bonuses have been deferred and more are paid in shares instead of cash. Other banks have changed the criteria for awarding bonuses from sales to customer satisfaction. In the U.K., rules now allow banks to claw back top managers’ bonuses for up to 10 years.

New York Times

China is testing a program that allows banks with bad loans to sell that debt to investors.

Zhou Xiaochuan, the governor of the People’s Bank of China, and Pan Gongsheng, a deputy central bank governor, said that under the proposal the bad debt would be sold to institutional investors, rather than have banks hold the bad debt to free up capital for new business. Some experts are skeptical, saying this could help banks to temporarily shore up their balance sheets but could cause greater difficulties in the long run.

Zhou and Pan vow to take measures, monitored closely by regulators, to ensure that these efforts keep from creating the factors that were largely responsible for the global financial crises of 2008. The pilot includes a small numbers of major financial institutions and excludes mom-and-pop investors. Economists say many Chinese banks, in a practice known as “extend and pretend,” fail to force companies to pay back loans or restructure, raising concerns that its biggest banks may hold a substantial number of bad loans. Meanwhile, China’s total debt stands at 2.5 years’ economic output, much of it corporate debt, as the country’s economic performance has hit its slowest rate in 25 years.