Editorial November 29, 2009
The crisis in Dubai has been a sharp reminder that there are still more aftershocks of the credit crunch to ripple around the globe. When Dubai World announced it was seeking a six-month debt standstill, the fear was this was a Lehman Brothers of the Middle East ushering in a dangerous second phase of the financial crisis. Just as economies were beginning to recover from the biggest shock since the Great Depression of the 1930s, it looked as if we were teetering again on the edge.
Dubai is a monument to the excesses that gave us this global financial crisis. The boom in the former British protectorate was spectacular and so has been the bust. Property prices went as high as its famous skyscrapers before plunging back down to earth. The 1.2m expats who went there in search of a new life, including 120,000 Britons, have known that the good times had ended, although most have chosen to stick it out.
If banks had an excuse for their reckless behaviour during the credit boom, it was that many of the assets they created that turned toxic were highly complex. In the case of Dubai there is no such excuse. Even casual observers could see this was a boom built on sand. Yet the banks kept lending, and some will suffer big losses.
Despite the shock of last week’s announcement, there is no reason it need result in another crisis. The sums involved are relatively small: Dubai’s debts of $80 billion compare with the International Monetary Fund’s current estimate of $3.4 trillion of global losses on toxic assets. Although Dubai’s assets have taken a tumble, they are still worth comfortably more than its debts. Abu Dhabi, its fellow emirate, will step in; it indicated this weekend that it will help to bail Dubai out.
Dubai has, however, spooked the debt markets and raised new worries about sovereign debt. Latvia, Greece and Ireland are all regarded as vulnerable by investors. Nor is Britain immune. Although there is no serious prospect of a default on UK government debt, the credit rating agencies have given notice that if a credible plan is not implemented to cut the budget deficit after the general election, the country’s AAA rating will be under threat.
That would not be the end of the world; Japan and Canada both suffered a ratings downgrade in recent years. But it would increase the cost to taxpayers of servicing official debt, adding to the impact of the crisis. It would also be an epitaph to Gordon Brown’s management of the economy.
Our fate and those of the banks are closely intertwined. Last week the Bank of England revealed that it had secretly lent Royal Bank of Scotland and HBOS £61.6 billion when both were facing collapse a year ago. Those loans, only now disclosed although taxpayers had the right to know sooner, had been repaid by January this year. Such is the scale of continued official support for the banks that this was more of a book-keeping adjustment than a meaningful transaction.
Lloyds Banking Group, which now owns HBOS, has admitted to £165 billion of such support, mainly from the Bank of England. RBS is 84% owned by the taxpayer and has £280 billion of its dodgy assets in the government’s protection scheme.
Getting the banks off life support will be a slow process, which has already involved substantial costs to the taxpayer. A renewed crisis could take us back to square one. Confidence remains fragile, which is why the markets reacted as they did. Dubai and its creditors need to nip this one in the bud.
Dubai is a monument to the excesses that gave us this global financial crisis. The boom in the former British protectorate was spectacular and so has been the bust. Property prices went as high as its famous skyscrapers before plunging back down to earth. The 1.2m expats who went there in search of a new life, including 120,000 Britons, have known that the good times had ended, although most have chosen to stick it out.
If banks had an excuse for their reckless behaviour during the credit boom, it was that many of the assets they created that turned toxic were highly complex. In the case of Dubai there is no such excuse. Even casual observers could see this was a boom built on sand. Yet the banks kept lending, and some will suffer big losses.
Despite the shock of last week’s announcement, there is no reason it need result in another crisis. The sums involved are relatively small: Dubai’s debts of $80 billion compare with the International Monetary Fund’s current estimate of $3.4 trillion of global losses on toxic assets. Although Dubai’s assets have taken a tumble, they are still worth comfortably more than its debts. Abu Dhabi, its fellow emirate, will step in; it indicated this weekend that it will help to bail Dubai out.
Dubai has, however, spooked the debt markets and raised new worries about sovereign debt. Latvia, Greece and Ireland are all regarded as vulnerable by investors. Nor is Britain immune. Although there is no serious prospect of a default on UK government debt, the credit rating agencies have given notice that if a credible plan is not implemented to cut the budget deficit after the general election, the country’s AAA rating will be under threat.
That would not be the end of the world; Japan and Canada both suffered a ratings downgrade in recent years. But it would increase the cost to taxpayers of servicing official debt, adding to the impact of the crisis. It would also be an epitaph to Gordon Brown’s management of the economy.
Our fate and those of the banks are closely intertwined. Last week the Bank of England revealed that it had secretly lent Royal Bank of Scotland and HBOS £61.6 billion when both were facing collapse a year ago. Those loans, only now disclosed although taxpayers had the right to know sooner, had been repaid by January this year. Such is the scale of continued official support for the banks that this was more of a book-keeping adjustment than a meaningful transaction.
Lloyds Banking Group, which now owns HBOS, has admitted to £165 billion of such support, mainly from the Bank of England. RBS is 84% owned by the taxpayer and has £280 billion of its dodgy assets in the government’s protection scheme.
Getting the banks off life support will be a slow process, which has already involved substantial costs to the taxpayer. A renewed crisis could take us back to square one. Confidence remains fragile, which is why the markets reacted as they did. Dubai and its creditors need to nip this one in the bud.
Sunday Times
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