Friday, 27 November 2009

Very Sharp Reminder

Just when we were believing we were free of recession and the financial crisis was all but over, Dubai has shocked the world.

We were busy worrying how to curb bankers' bonuses and when the economy would show growth again - then we had a day of turmoil as stock markets reacted badly to the news that Dubai World, the state owned investment company, delayed payment on its quarterly debt repayments. Almost unnoticed, book store group Borders slipped into administration following the Thresher off licence chain, making a further 1,000+ people unemployed in the UK.

Dubai has enjoyed a six year period of unprecedented growth as it has invested enormously in property, both commercial and private and the market for it has been buoyant. As an Emirate state it is not blessed with a rich supply of oil but its strategic location makes it compete with Hong Kong as one of the great ports in the world for international freight transport. Dubai has been Western-friendly and inward investment has been enormous but Dubai World itself has clocked up astronomic debts of $59bn.

It's another tragic example of a total belief that asset values can only go up and that all debts can be repaid. The mind boggles to try and work out how many times that vast debt has been chopped up, repackaged and sold multiple times around the globe as part of derivative trades and credit default swaps upon which banks and their trading employees have pocketed enormous profits and bonuses.

This is a stark and sharp reminder of the folly of the global banking system. The total belief that any debt is good and that asset values will always rise has been the bedrock of the financial system that has turned into the sands of the Arabian desert. The creation of structured products to trade around these debts is like a terrible cancer ravaging the financial system and this shows how very easily the whole system can get a critical blow. This kind of catastrophic failure in debt servicing threatens to have a domino effect and I am sure there are many bank executives who are nervously watching and hoping that the oil rich Government of Abu Dhabi steps in to bailout Dubai World - Dubai has total debts of over $80bn.

There is a good reason why everyone is nervous. Dubai World is not the only entity in Dubai which owes incredible amounts of money. If the Dubai economy fails, the fallout could be felt all over the world and snag us all just when we believe we are recovering. As an eminent economist, Nouriel Roubini, has asserted, there is more bad news about debts to come and banks have not yet revealed the full picture on this yet.
Dubai is reminder of how bad things can get very quickly.

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