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.

Dubai Wobbles - What Does It Mean?

Two authoritative bloggers, Robert Peston and Stephanie Flanders on the BBC site have given the conventional view that the Dubai debt repayment blip is merely that.

They also argue that if push comes to shove then the European banks which are estimated to be exposed to around 50% of the total $80bn that Dubai owes, then they can absorb those losses well within their stride. In reality, they say a big Sugar Daddy in Abu Dhabi is on hand to pick up the tab anyway and they are just toying with Dubai.

It sort of shows just how punch drunk we have become to big numbers. This is a sovereign state - and a rich one at that - delaying loans because of excessive debt.

Hello!

Substitute any rich nation having trouble repaying their loans - and there may be a fair few soon - and you have the real picture. Countries all across the globe, with few exceptions, have vastly increased their borrowing to support the bank meltdown. In doing so, they have burdened their taxpayers with extraordinary new debts and, for the most part, they have underwritten the future debts of the entire global banking system. And we are in the final throws of a recession so there is no growth to offset these debts.

To my mind, Dubai is a stark reminder of how precarious the global economy has become and how interdependent we all are on one another. The butterfly wings beating in Dubai could have a dramatic effect on the world economy and particularly if we remain unimpressed by the magnitude of the numbers involved.

A sovereign state has found repaying its debt hard. It's a wake up call for us all - you don't need many more countries announcing the same for the world to become a pretty shaky place.

It's a real reminder to our Government - plan to repay those debts and take action now. Delay, and we could be in the same boat with no Sugar Daddy oil state locally to bail us out. It should make us think hard.

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.