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Dubai Aftermath The Pause that Refreshes?
January 6, 2010
It’s hard to believe it’s been over a month now since Dubai World defaulted on its debts, sending global markets into chaos while Americans settled down for some Thanksgiving turkey and football.
After the initial rumblings about a potential sweep of further defaults, other Gulf states, notably the United Arab Emirates (UAE), came to the rescue with fistfuls of petrodollars.
Global markets shrugged, and rallied on. The end seemed to come rather swiftly, and, more importantly, the news cycle moved on to Tiger Wood’s marital, um, defaults.
But that’s hardly appropriate.
Since Dubai World is wholly-owned by the government of Dubai, this default is, no matter how you phrase it, a sovereign default…a country setting the fine example for its citizens that it’s okay to be a deadbeat about your debt.
And on December 21st, while Americans were preparing for yet another round of holiday cheer, Dubai held a meeting for its various creditors. Didn’t hear about it? Well, it was a low-key affair, as apparently nearly half of the 300 expected creditors didn’t attend.
But of the 150 or so who did attend (Dubai does have an ample amount of hotel rooms, classy restaurants and swanky shops, after all), Dubai pulled the same kind of trick Iran and North Korea pulled on U.S. diplomats— it called for the creditors to create a panel before talks about repayment could proceed.
There’s a real problem here, and it’s not Dubai’s intransigence. The real problem here is that none of Dubai’s creditors are demanding repayment right now, or initiating foreclosure proceedings against Dubai World assets.
Sure, on the surface, the longer creditors wait to foreclose, the longer they have to wait to make the painful write-off on their poor lending decision.
How long are we talking here? At least another six months.
"They have not revealed plans to restructure the debt or repayment methods. They just told us that their assets are much bigger than liabilities; at least it looks so on paper. I think the whole restructuring will take time until June," said a Gulf bank executive at the meeting.
This "kick the can down the road" strategy can have its benefits and drawbacks. In six months Dubai, thanks to the backing of the UAE and other lifelines, could pay back what it owes in full. If not, it can continue to kick the can down the road; just like U.S. politicians do with entitlement spending.
Gosh, Dubai just seems to learn the worst habits that other governments practice.
And with a debt load of $40 billion against a lifeline of $10 billion, it’s likely the latter strategy— kicking the can down the road— will prevail in the interim.
While there are a myriad of lessons to be learned from the Dubai debacle, there’s one optimal one. When someone’s going to build the world’s tallest anything, let alone the world’s tallest buildings in the middle of an artificial bit of land extended into the ocean, it’s best to let someone else carry the risk.
Stay Sovereign,
Andrew Packer
Editor of The Credit Crunch Short Report
----------------------------------------------------------------------------------------------------------------------------------------
THE SOVEREIGN SOCIETY Ltd.,
98 SE 6th Ave., Suite 2, Delray Beach, FL 33483
TEL: 888-856-1403
Original Posting At: TheSovereignSociety
After the initial rumblings about a potential sweep of further defaults, other Gulf states, notably the United Arab Emirates (UAE), came to the rescue with fistfuls of petrodollars.
Global markets shrugged, and rallied on. The end seemed to come rather swiftly, and, more importantly, the news cycle moved on to Tiger Wood’s marital, um, defaults.
But that’s hardly appropriate.
Since Dubai World is wholly-owned by the government of Dubai, this default is, no matter how you phrase it, a sovereign default…a country setting the fine example for its citizens that it’s okay to be a deadbeat about your debt.
And on December 21st, while Americans were preparing for yet another round of holiday cheer, Dubai held a meeting for its various creditors. Didn’t hear about it? Well, it was a low-key affair, as apparently nearly half of the 300 expected creditors didn’t attend.
But of the 150 or so who did attend (Dubai does have an ample amount of hotel rooms, classy restaurants and swanky shops, after all), Dubai pulled the same kind of trick Iran and North Korea pulled on U.S. diplomats— it called for the creditors to create a panel before talks about repayment could proceed.
There’s a real problem here, and it’s not Dubai’s intransigence. The real problem here is that none of Dubai’s creditors are demanding repayment right now, or initiating foreclosure proceedings against Dubai World assets.
Sure, on the surface, the longer creditors wait to foreclose, the longer they have to wait to make the painful write-off on their poor lending decision.
How long are we talking here? At least another six months.
"They have not revealed plans to restructure the debt or repayment methods. They just told us that their assets are much bigger than liabilities; at least it looks so on paper. I think the whole restructuring will take time until June," said a Gulf bank executive at the meeting.
This "kick the can down the road" strategy can have its benefits and drawbacks. In six months Dubai, thanks to the backing of the UAE and other lifelines, could pay back what it owes in full. If not, it can continue to kick the can down the road; just like U.S. politicians do with entitlement spending.
Gosh, Dubai just seems to learn the worst habits that other governments practice.
And with a debt load of $40 billion against a lifeline of $10 billion, it’s likely the latter strategy— kicking the can down the road— will prevail in the interim.
While there are a myriad of lessons to be learned from the Dubai debacle, there’s one optimal one. When someone’s going to build the world’s tallest anything, let alone the world’s tallest buildings in the middle of an artificial bit of land extended into the ocean, it’s best to let someone else carry the risk.
Stay Sovereign,
Andrew Packer
Editor of The Credit Crunch Short Report
----------------------------------------------------------------------------------------------------------------------------------------
THE SOVEREIGN SOCIETY Ltd.,
98 SE 6th Ave., Suite 2, Delray Beach, FL 33483
TEL: 888-856-1403
Original Posting At: TheSovereignSociety
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