Edward Steichen ‘Brancusi’s Studio, Paris’
There is a Chinese curse; ‘May you live in interesting times’. We are!
Even as millions of Americans are tiredly performing the holiday ritual of grinding turkey guts in order to make ‘stuffing’ or heating up giant pails of grease in order to deep- fry their birds, our international economic calamity unwinds itself a bit more. Events are now taking place in billionaire- haven Dubai. Here’s Bloomberg:
By Laura Cochrane and Tal Barak Harif
Nov. 26 (Bloomberg) — Dubai is shaking investor confidence across the Persian Gulf after its proposal to delay debt payments risked triggering the biggest sovereign default since Argentina in 2001.
The cost of protecting government notes from Abu Dhabi to Bahrain rose, extending the steepest increase since February as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors. Bonds of its property unit, Nakheel PJSC, mature Dec. 14. Dubai contracts climbed 124 basis points to 564, the most since they began trading in January, adding to 122 yesterday, CMA Datavision prices showed.
“There is nothing investors dislike more than this kind of event,” said Norval Loftus, the head of convertible bonds and Islamic debt at Matrix Group Ltd. in London, which manages $2.5 billion of assets including Dubai credits. “The worst-case scenario will of course be involuntary restructuring on the Nakheel security that brings into question the entire nature of the sovereign support for various borrowers in the region.”
Moody’s Investors Service and Standard & Poor’s cut the ratings on state companies yesterday, saying they may consider state-controlled Dubai World’s plan to delay debt payments a default. The sheikhdom, ruled by Sheikh Mohammed Bin Rashid Al Maktoum, borrowed $80 billion in a four-year construction boom that reduced its reliance on falling oil supplies and created the region’s tourism and financial hub.
Dubaians don’t make anything, they have nothing to sell to the greater world to service their loans. They simply leech from others in the tradition of the other world’s middlemen from the City of London, to Hong Kong to Wall Street. The oil reserves of Dubai were minuscule, those of the greater UAE – are petering out. Unsurprisingly, the gilded Persian Gulf ambitions have petered out as well. There is less of the world available for all the middlemen to leach from while the numbers of middlemen exponentially increase.
Doubts about credit issued by other Gulf states as well as by investors’ darlings the developing nations are consequently rising. Added also are the increasing roll- call of debtor states who have started to reach the borrowing limit – service costs of added debt are too great to bear – and the outlines of the next deleveraging episode are starting t0 take form.
Like mortgage- backed securities that have contributed to bank distress over the past couple of years, Dubai debt securities are widely distributed internationally. How and where all the dominoes fall is hard to tell at this stage. The Dubai World debt by itself is tiny compared to equivalent US- and Eurozone- mortgage debt- based securities, but institutions are still over- leveraged and there may be (probably is) much more toxic Middle Eastern debt on banks’ books. The apparent ‘high quality’ of Dubai debt raises doubt over other borrowings. Leverage expands the effects of defaults as there are ripple effects; defaults causing greater defaults among over- leveraged institutions that hold the debt as collateral against more debt issued elsewhere.
A question will be who are counter- parties to Dubai credit default swaps?
The distance between ‘debt’ and ‘bad debt’ is exceedingly small and shrinking.
Greece tests the limit of sovereign debt as it grinds towards slump
Greece is disturbingly close to a debt compound spiral. It is the first developed country on either side of the Atlantic to push unfunded welfare largesse to the limits of market tolerance.Euro membership blocks every plausible way out of the crisis, other than EU beggary. This is what happens when a facile political elite signs up to a currency union for reasons of prestige or to snatch windfall gains without understanding the terms of its Faustian contract.When the European Central Bank’s Jean-Claude Trichet said last week that certain sinners on the edges of the eurozone were “very close to losing their credibility”, everybody knew he meant Greece.
The interest spread between 10-year Greek bonds and German bunds has jumped to 178 basis points. Greek debt has decoupled from Italian debt. Athens can no longer hide behind others in EMU’s soft South.
“As far as the bond vigilantes are concerned, the Bat-Signal is up for Greece,” said Francesco Garzarelli in a Goldman Sachs client note, Tremors at the EMU Periphery.
The newly-elected Hellenic Socialists (PASOK) of George Papandreou confess that the budget deficit will be more than 12pc of GDP this year, four times the original claim of the last lot. After campaigning on extra spending, it will have to do the exact opposite. “We need to save the country from bankruptcy,” he said.
At issue is the commonplace notion of ‘sustainable recovery’ which is promoted by salesmen across the entire establishment. What this means is the recovery part in developed nations is imported from ‘others’ elsewhere. The failures in developed world’s debt indicate the others aren’t as interested or capable of exporting whatever recovery they themselves feel they might need or want later.
What this sets up is a clash between those who have and those who might have. A similar array of international forces expressing desire for outside resources existed across the post- WWI world. The outcome was depression and eventually a second great war. Germany desired the space, farmland and resources of Eastern Europe and western USSR as well as dominion over France and England. Japan desired the oil of the West Indies and hegemony over China and Korea. The outcome of depression was the appearance of crippling economic and accompanying military weakness across the West. That the ‘arsenal of democracy’ was mired in a ten- year economic decline made war with Germany and Japan almost inevitable.
A key event was the failure of the Austrian Creditanstalt Bank in 1931. Its failure led to a domino- effect of bank failures both in Europe and in the US. A contributing cause was the unwillingness of developed countries to lend freely to Austria. One reason was the desire among these nations to maintaining the peg between their currencies and gold. The inability to provide credit where needed in Europe accompanied the rise of National Socialists in Germany and sympathizers in Austria and elsewhere. The failure of Creditanstalt illuminated the indecisiveness of France and its ruling clique and the general inertia of the establishment as a whole. The price paid by France and others for turning their backs away from Austria was the conquest of France by Germany nine years later.
The stakes are far higher now as resource- thirsty populations are much greater than in the 1930’s. America, Japan and Western Europe are becoming economic ‘sick men’. All are dependent both on imported energy and credit. At issue is not so much the willingness to provide nominal credit but rather the ability to provide credit of any real value. Unlike the 1930’s, the world has the willingness to extend credit. The credit ‘cure’ the sovereign makes available is little different from what is diseased and defaulting.
The office vacancy rate in Abu Dhabi right now is a pretty healthy 5%. In Dubai, however, the vacancy figure is closer to 25%. And those rates will probably go up between now and 2011 when those buildings that are going up around us finally are completed. In fact, some brokers think half of the office space in Dubai might be empty in two years’ time.
A similar phenomenon is in evidence in Dubai’s residential-property sector. The reason apartments and houses are easier to find right now is that there are more of them — and fewer people to take them. With foreign investors packing up because of the financial crisis, the construction boom of the past six years has found itself alone in the room. There’s a lot less demand for apartments, a situation that can only get worse when tens of thousands of additional units come on to the market. Colliers International, a property consultant, figures there’ll be 34,000 additional new homes in Dubai alone in two years, an oversupply that means whatever recovery one might have expected in property prices is that much farther away.
Much of the world’s resources have been wasted on palm tree- shaped real estate developments and gas- wasting suburbias and SUV’s. This is a failure of collective imagination. While war is not an immediate outcome, the general collapse of credit is part of the punishment that laws of both gravity and averages are currently meting out. Without increases in resources, there is no basis for expanding credit.
The overall outcome is the tail end of the bailout phase heaves into view. What appears secure about the sovereign is just that, an appearance. This is dangerous as the appearance of sovereign omnipotence is an important governor on irrational impulses. If the government- center does not hold, what will?
Saudi Arabia’s oil production company is Saudi Aramco. Its former Vice President of oil exploration and production, Sadad al Husseini, recently made the following comment on oil prices at the 30th Oil & Money Conference, held in London on October 20-21:
… as you go up to say $90 a barrel, you’re consuming 4.5% of the global economy [for oil]. That in itself is a ceiling – you cannot go indefinitely into more expensive alternatives without destroying [the] economy and therefore destroying demand. So we do have a ceiling on prices and how much expensive alternative fuel we can put into the market.
At the same time, the effects of spreading defaults and deleveraging would cause a flight to dollars and the nominal decline in crude price. Saudia would have less dollars – which would be worth more – but fewer customers sending dollars. Debt issued against rising crude sales or values would be hazarded by more defaults. The outcomes of this episode will unwind over the next few weeks and months, but starting now, times will become much more ‘interesting’.