Monday, 30 November 2009

Honouring Debts

The one thing that is becoming apparent about the Dubai World debt crisis is that Governments are getting tired of just accumulating more debts.

The governments of Dubai and Abu Dhabi are taking a pragmatic view on the debts at Dubai World - they basically say they will pick and choose where to bailout but creditors need to front up to their responsibility as well as Dubai World doing so. While there have been some short term liquidity measures taken by the UAE banks, effectively Dubai World is a pretty unsafe bet and no one is going to step in and pick up a full tab.

At last, some sanity. It finally shows, if a company or entity recklessly gambles on growth via continually rising asset values and creditors lend them money because they think they cannot lose as they can trade and trade the debts, perhaps the Dubai hiccup has taught us the lesson that a debt is just a debt. The even better news is that just because Dubai World is big and important, Governments are in no way going to just save it when it makes stupid decisions.

The fall out of this crisis, being downplayed in most quarters as a side show and trivial in the great scheme of lending, has yet to be really felt. I suspect that credit agencies and creditors will be taking a great deal more interest in what the British Government is doing in order to secure its ability to repay its growing debt. Hope isn't a strategy, as I have blogged before, and it is high time we saw some action on curbing and cutting costs as well as strategic spending to stimulate the economy rather than just shoring up the balance sheets of banks who risk the free cash to make more profits while no real effect is felt in the actual economy.

I still believe that Dubai is a salutary lesson once again that not enough is known about our financial system, locally or globally, and there are few safeguards against high risk products being traded.

No comments: