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It was about two years ago, and I was in Dubai to cover an investment conference at a hotel along Jumeirah Beach. Hundreds of Western bankers dressed in Savile Row suits were packed into an enormous room to bone up on the intricacies of the next new thing in financial products: Shariah-compliant investments.
They wanted to sell them to wealthy, oil-rich Muslim investors who needed a way to increase their fortunes but whose options were limited. Any investment vehicle needed to conform to the spirit of the Koran, which forbids any investments that pay interest. No mortgages. No bonds. No clever derivatives. Just tangible assets in the so-called real economy.
It was a big honey pot — worth as much as $1 trillion that could yield billions in fees — and the bankers were determined to find a way in.
(Despite Islamo-Fascism and the War on Terror :eek
One discussion was led by a British banker from Barclays who had moved to the region to create an entire Shariah-compliance team. He shared tips about various ways to create “structured products” that would pass muster with Muslim investors. (To me, the investments looked like bonds, walked like bonds and talked like bonds — but he never called them that.) Some of the bonds that Dubai World is in jeopardy of defaulting on, by the way, are Shariah-compliant sukuk. Just don’t call them bonds.
He was struggling to hire enough Shariah scholars, he said, and he needed them to bless the investments — apparently there was a shortage of properly trained Islamic scholars who did this kind of work.
With the benefit of hindsight — and you didn’t need much — there were plenty of other signs back then that Dubai was building a financial mirage in the desert.
With hours to kill before a late-night flight, I ventured over to the Ski Dubai indoor ski run. It’s a pretty good bet that a city with an average temperature of 90 degrees and an indoor ski slope is probably living a little too large. On one ride up the chairlift, I sat next to a 7-year-old from London who had just moved to town. With a big grin, he proudly told me that his father was in “the real estate business.”
For the last couple of years, the running joke on Wall Street was “Dubai, Mumbai, Shanghai or goodbye.” If you were the C.E.O. of a troubled investment bank desperately looking for cash, you made a pilgrimage to one of those three cities with hat in hand. They were the places most likely to write a quick billion-dollar check; their eagerness should have also been a tip-off. Now you have to wonder about Mumbai and Shanghai, too. Are they next in line to take a fall?
Willem Buiter, a former Bank of England official who was hired as chief economist of Citigroup on Monday, says that Dubai’s credit crisis is just the natural progression of “the massive build-up of sovereign debt as a result of the financial crisis.” He wrote on his blog on The Financial Times’s Web site that the contraction of credit “makes it all but inevitable that the final chapter of the crisis and its aftermath will involve sovereign default, perhaps dressed up as sovereign debt restructuring or even debt deferral.”
With all the money pouring into the region, it would have been hard for any doomsday types to make themselves heard. But there were whispers here and there, pointing out the obvious. David Rubenstein, the co-founder of the private equity giant Carlyle Group who was in Dubai at the conference, remarked to me at the time: “You know, they don’t have any oil here.”
That fact was overlooked by many investors who didn’t want to miss out on a quick buck. What about the risk? The view was, and apparently still is, that if Dubai gets in trouble, its oil-rich neighbors in Abu Dhabi will bail everyone out to avoid damage to their collective reputation and, by extension, the region’s economy. Just as the United States stood behind its banks, in part, to avoid losing the confidence of foreign investors, Abu Dhabi might have to do the same.
That had to be what Citigroup, with its firsthand expertise with bailouts, must have been thinking when it lent $8 billion to Dubai last year. Oh, and here’s an interesting fact: Citigroup made the loan to Dubai on Dec. 14, 2008. Take a look at the calendar — that’s after it received tens of billions in TARP funds. Citigroup’s chairman, Win Bischoff, said at the time, “This is in line with our commitment to the U.A.E. market in general, and reflects our positive outlook on Dubai in particular.” Good call. And what became of all those Shariah-compliant financial instruments that were the hot topic of that panel I attended? It turns out that many of them that were sold prior to the crisis weren’t compliant at all.
The Shariah Committee of the Accounting and Auditing Organization for Islamic Institutions, which is based in Bahrain, ended up changing the rules to make them stricter because of widespread abuse. As Mr. Buiter described them on his blog, “these were window-dressing pseudo-Islamic financial instruments that were mathematically equivalent to conventional debt and mortgage contracts.”
Blessings, alas, can do only so much.
(See- Jesus wants you to be rich :rolleyes
http://www.nytimes.com/2009/12/01/bu...l?ref=business
Let's deconstruct a bit- it can be fun
So it was the homeowners all along...that worried the governments.
As Dubai, that one-time wonderland in the desert, struggles to pay its bills, a troubling question hangs over the financial world: Is this latest financial crisis an isolated event, or a harbinger of still more debt shocks?
For the moment, at least, global investors seem to be taking Dubai’s sinking fortunes in their stride. On Monday, the American stock market rose modestly, even as share prices plunged throughout the Persian Gulf.
Always a solid indicator of our financial state....
But the travails of Dubai, a boomtown that, with its palm-shaped islands and indoor ski slope became a potent symbol of hyperwealth, nonetheless have some economists wondering where other debt bombs might be lurking — and just how dangerous they might turn out to be.
Yes. laddies, the world is a dangerous place. What despicable debt bombs lie in wait for unsuspecting bankers....
Big banks that have only just begun to recover from the financial shocks of last year are now nervously eying their potential exposure to highly indebted corporations and governments.
Alas, what can the poor blokes do?
From the Baltics to the Mediterranean, the bills for an unprecedented borrowing binge are starting to fall due. In Russia and the former Soviet bloc, where high oil prices helped feed blistering growth, a mountain of debt must be refinanced as short-term i.o.u.’s come due.
No Hudson analysis here
Even in rich nations like the United States and Japan, which are increasing government spending to shore up slack economies, mounting budget deficits are raising concern about governments’ ability to shoulder their debts, especially once interest rates start to rise again.
Eye, lads, the economy be slack, much like being in the doldrums...a phenomenon of Nature ;)
The numbers are startling. In Germany, long the bastion of fiscal rectitude in Europe, government debt is on the rise. There, the government debt outstanding is expected to increase to the equivalent of 77 percent of the nation’s economic output next year, from 60 percent in 2002. In Britain, that figure is expected to more than double over the same period, to more than 80 percent.
The burdens are even greater in Ireland and Latvia, where economic booms driven by easy credit and soaring property values have given way to precipitous busts. Public debt in Ireland is expected to soar to 83 percent of gross domestic product next year, from just 25 percent in 2007. Latvia is sinking into debt even faster. Its borrowings will reach the equivalent of nearly half the economy next year, up from 9 percent a mere two years ago.
All of which happened much like spontaneous combustion...aka- shit happens.
Like Latvia, the Baltic states of Lithuania and Estonia remain worryingly exposed, as do Bulgaria and Hungary. All of these nations carry foreign debt that exceeds 100 percent of their G.D.P.’s, said Ivan Tchakarov, chief economist for Russia and the former Soviet states at Nomura bank. External debt is often held in a foreign currency, which means governments cannot use devaluation of their own currencies as a tool to reduce their debt when they run into trouble, according to Maurice Obstfeld, an economics professor at the University of California, Berkeley.
According to a Berkeley professor...
Few analysts predict a major nation will default on it government debts in the immediate future. Indeed, many maintain that rich nations and the International Monetary Fund would intervene if a government needed a bailout.
But there are no assurances that companies in these nations, which, like governments, gorged on debt in good times, will be rescued. Dubai’s refusal to guarantee the debts of its investment arm, Dubai World, may set a precedent for other indebted governments to abandon companies that investors had in the past assumed enjoyed full state backing.
Deconstruction Overload :mad::mad::mad: The last two paragraphs are so loaded with bullshit that commenting is too complimentary.
“I see very good reasons to be worried that at some point in 2010 we are going to see more cases of ring-fencing because governments realize they can’t afford to guarantee the debts of these companies,” said Pierre Cailleteau, managing director of the global sovereign risk group and chief economist of Moody’s.
ring-fencing? We need help here....
Kenneth Rogoff, a Harvard economist whose recent book, “This Time Is Different,” chronicles 800 years of financial crises, said: “I think right now every vulnerable country has one or two deep-pocketed backers that pretty much rule out a sudden run.” But Mr. Rogoff said he expected a wave of defaults about two years from now, when the countries now serving as implicit guarantors turn their focus to economic problems at home.
One feature of the financial crisis is that some governments have taken on increasingly short-term debt. In the United States, for example, Treasury debt maturing within one year has risen from around 33 percent of total debt two years ago to around 44 percent this summer, while falling slightly since then, according to Wrightson ICAP. The United States will soon have debt problems of its own.
“In another couple years as industrialized countries’ own debts — in places like Germany, Japan and the United States — get worse, they will become more reluctant to open up their wallets to spendthrift emerging markets, or at least countries they view that way,” Mr. Rogoff said.
the US an industrial country?- we blush at the compliment.
This might spell trouble for struggling nations. Facing a need to roll over their maturing debts, emerging markets may have to borrow around $65 billion in 2010 alone, according to Gary N. Kleiman of Kleiman International.
But while government debt may be a problem, corporate debt may set off a crisis that, in some ways, is already unfolding.
Corporate borrowing surged over the last five years. According to Mr. Kleiman, $200 billion of corporate debt is coming due this year or next year. He estimates that companies in Russia and the United Arab Emirates account for about half of that borrowing.
“This is where the Achilles heel is,” he said.
This 'analysis' is Greek to me :confused:
Companies in several countries face immediate tests. Companies in China will have to borrow $8.8 billion in 2010; companies in Mexico $11 billion.
According to an analysis by JPMorgan Chase, Russian companies borrowed $220 billion from banks or by selling bonds from 2006 to 2008. That is the equivalent of 13 percent of Russia’s gross domestic product. In the Emirates, that figure was $135.6 billion, or 53 percent of G.D.P.; in Turkey, it was $72 billion, or 10 percent of G.D.P.; and in Kazakhstan, it was $44 billion, or 44 percent of G.D.P.
In the past, if companies could not meet those obligations, governments might have stepped in. But already some companies have defaulted on payments after assumed government guarantees failed to materialize.
In Russia, for instance, the foreign debt totals more than $470 billion. But only a tiny fraction of that — about $29 billion — is sovereign debt. The rest is owed by Russian companies, including state giants like Gazprom.
The most troubling case in Russia is Rusal, the world’s largest aluminum company, which owes $16 billion and has been in a standstill on repayment this year while dealing with creditors.
A subsidiary of a Russian state aircraft manufacturer defaulted on bonds last autumn despite a presumed sovereign guarantee. In Ukraine, the state energy company, Naftogaz, and a state railroad, have restructured or asked to restructure their debt.
“This was a trail that was blazed in this part of the world,” said Rory MacFarquhar, an economist at Goldman Sachs in Moscow, referring to governments retreating from implied guarantees of state company debt, as in the case of Dubai World.
The Dubai World debt restructuring is already lifting borrowing costs for Russian companies that must repay a total of $20 billion in December, according to Vladimir Tikhomirov, chief economist of UralSib bank in Moscow.
http://www.nytimes.com/2009/12/01/bu...l?ref=business
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