Thursday, November 26, 2009
Would Dubai's Default Spoil the Party?
The big news today is that Dubai World, the big property conglomerate with many prestigious and some world famous developments under their belt, has requested its creditors to allow it an additional six months to pay a debt of $3.5 billion, which was due next month. The news immediately undermined the stocks of British banks, which were showing signs of recovery, and pulled the major European stock markets down. The impact is more severe because this debt deferment request also includes Nakheel's debts, a Dubai World subsidiary and the one which actually did some fascinating projects; no one was expecting that Nakheel will default as well. Besides, there are several state-backed companies which are defaulting or are near default, which is undermining the credit rating of Dubai's sovereign debt itself. This will limit the state's ability to raise money and bail the troubled companies out. So, suddenly, we see a trouble in the horizon; just when it seemed that we are on the path of recovery.
Dubai was always a bubble. It built a neo-gilded age capitalism, based on wildly speculative property projects. While it lasted, it was speculators' heaven, and properties got 'flipped', sold, multiple times even before they were built. All fuelled by debt - almost all based on cheap money flowing in Europe and America, and subsistence labour extracted out of poor Asian countries. The problem is that most of properties were being bought not to be lived in, but as investments, which is the respectable word for speculation. If one needed to see what is wrong with Capitalism, one visit to Dubai would have been enough: It was rent capitalism at its best.
Now, we are at the payback time. Dubai's companies will have to pay back or renew $60 billion debt in the next 12 to 18 months, and that is a big headache. Capital is fleeing Dubai. Despite the common perception, Dubai has no significant oil wealth and is a pure services economy. So, the credit rating downgrade is lethal, this will make speculators run immediately and getting people to refinance these debts increasingly difficult. If this continues, we shall suddenly see the next chapter of Great Recession - capitalism's ugly underbelly - unfolding in front of our eyes.
Almost the only way for Dubai to save itself is to secure loans from a bigger, oil rich neighbour. Almost everyone guessed that Abu Dhabi can't let Dubai fail, as they are part of the same Emirates federation and share the same currency. Abu Dhabi is cash rich with their oil wealth, and is much less leveraged. But recent rumours suggested rifts between two ruling families, including a tussle on the Emirates Airlines shares. Emirates is possibly the best things that happened in Dubai over the last decade, a professional airline with a convenient hub right in the middle of Asia, Europe and Africa. If Dubai had one advantage, it was its geographic location; this was leveraged by Emirates to the best possible extent. In contrast, Abu Dhabi's success with its own Etihad was fairly limited, and talk of merger was one the air. This did not happen, as personalities came into play, perhaps. Unfortunately for Dubai, the bigger, wealthier neighbour is actually their best chance at this time.
The others who could bail them out, and will possibly still bail them out, are Kuwaitis and Saudis. Kuwaitis already have a lot of investment in Dubai and they may be forced to cover their tracks. Saudis have less at stake, and they were royally miffed last year when Dubai bid to get the proposed Arab monetary union headquartered in Dubai. But, any further meltdown of Dubai may affect the entire region and even undermine the political influence of the Sauds. So, their hand may also be forced now to lend money and restore confidence.
But, the point is, this will still spoil the party. At a time when investor confidence was just about coming back, an ugly bailout in the Middle East will shake the banks and upset the fragile European recovery. Joblessness will spread in Asian economies, as migrant labourers are sent home and this will fuel political turmoil in many of these countries. The Dubai flu will soon become a worldwide phenomenon.
Dominic Strauss-Kahn, the head of IMF, recently talked about the huge exposure the banks still have to leveraged assets and how we may all face a relapse to credit crisis soon. Just when it looked that the combined effort of World governments managed to save embattled economies like Iceland, Ireland and the East European ones, Dubai's troubles are a clear reminder that we are not out of the woods yet. We also have to remember that such economic troubles always have a domino effect, and it only takes a few hours for one country's trouble to spread into a whole region. We know Dubai's story is more or less over, but the bigger question - whether this can be contained in Dubai or does it have to invariably spread over a larger space - will only be answered in the next 8 to 12 weeks. The problem is that the energy to solve such crisis is at a all time low now. Gordon Brown, who took the lead when the crisis hit us, looks battered, unloved and ready to retire. One almost misses the naivety and dumbness of the Bush team; Obama is already so deep into crisis of his own making that he can hardly focus on anything else. Everyone else seems to have their hands full and looking at bailouts themselves. So, Dubai's troubles may spin out of control quite quickly and bring a lot of people down with it.
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How To Live
"Far better it is to dare mighty things, to win glorious triumphs even though checkered by failure, than to rank with those poor spirits who neither enjoy nor suffer much because they live in the grey twilight that knows neither victory nor defeat."
- Theodore Roosevelt
- Theodore Roosevelt
We shall not cease from exploration
And the end of all our exploring
Will be to arrive where we started
And know the place for the first time.
- T S Eliot
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