Dubai brings honesty to global finance
Richard Moore
should default on its debts if it has any hope of restoring national
sovereignty.
Instead they are all going back to the banking mafia for still more
credit to refinance their debt, pushing their populations deeper
and deeper into debt slavery. This is an act of treason by government
leaders, as were the bailouts. Dubai demonstrates national sanity.
rkm ___________
http://www.wsws.org/articles/2009/nov2009/duba-n28.shtml
World Socialist Web Site <http://www.wsws.org/index.shtml>wsws.org
Dubais $59 billion default sends tremor through global financial
system By Alex Messenger 28 November 2009 Dubais announcement on
Wednesday that it would be delaying by at least six months the
maturity date of $59 billion in bonds issued by the city-states
largest state-owned company, Dubai World, has sent global shares
tumbling. The market reaction to Dubais massive debt default is
partly explained by the exposure of European and Asian banks to DP
World and its tourism subsidiary, Nakheel.
The real reason for the falls, however, is that Dubais apparent
insolvency confirms that default by hyper-indebted government
borrowers is now a real risk right across the globe, especially in
the Middle East and Eastern Europe.
Such a default would not only mean an immediate worsening of the
already brutal post-crash conditions suffered by millions of workers
in defaulting countries, but would usher in a second, and probably
worse, phase in the global financial crisis.
A note published by Bank of America strategists warned of the
possibility of a major sovereign default. One cannot rule outas a
tail riska case where this would escalate into a major sovereign
default problem, which would then resonate across global emerging
markets in the same way that Argentina did in the early 2000s or
Russia in the late 1990s, the note said.
An editorial in todays Financial Times noted that while markets
were not expected to return to the panic of September 2008, because
the financial sector had state backstops, fearful investors have
started to worry about how safe sovereign debt is, citing Ireland
and Greece as two examples.
The Dubai meltdown represents only a small sum in terms of total
global indebtedness. Nevertheless it indicates that despite talk
of global economic recovery, the world remains on a knife-edge.
Attempts at reassurance by British prime minister Gordon Brown
indicate that financial and government elites are already fearful.
Brown this morning acknowledged the risk that Dubai posed to the
global economy but, with careful understatement, told reporters I
think we will find this is not on the scale of the previous problems
we have dealt with.
Market falls on news of the Dubai crisis were sharpest in Japan,
where a number of banks (including Mitsubishi UFJ and Semitoro
Mitsui) are directly or indirectly exposed. Japanese shares plummeted
3.2 percent yesterdaythe markets largest one day decline in 8 months.
A 2.9 percent fall in Australia the same day reflected the fact
that a Dubai World subsidiary, stevedoring company DP World, carries
one third of Australias sea cargo. In New York, the share index
opened 2 percent down and only partially recovered those losses.
Forty-four billion British pounds has been wiped off the London
market, the largest single day loss since March. Shares in UK bank
HSBC fell 7 percent.
HSBC is reported to have lent Dubai $17 billion. Other UK banks
with a Dubai exposure are Standard Chartered, Citigroup UK, Lloyds
and Royal Bank of Scotland, an institution now majority-owned by
the UK government, which has received more bailout money ($67
billion) than any other bank in the world.
Dubai World accounts for three quarters of the $80 billion borrowed
by Dubais state-owned companies to fuel the emirates property boom.
That boomwhich came to an end when property values halved in a
period of weeks from October 2008was an expression of the global
elites fantasy of endless wealth, with Dubais ruling family creating
a desert playground for the global rich. Its most notable features
were the worlds tallest building, a giant indoor ski slope and a
series of vast man-made islands in the shape of palm trees and
stars. Dubai World, which manages billions in construction projects,
also used its foreign borrowings to diversify into global transport,
especially ports and shipping. DP World is the largest port operator
in the Middle East.
It is testimony to the anarchy and irrationality of the global
financial system that although the scale of the Dubai crisis has
been apparent for months, the governments default announcement still
caught global markets unawares. Banks had apparently assumed the
existence of an implicit government guarantee of DP Worlds debt,
if not by the Dubai government, then by Dubais sister emirate,
oil-rich Abu Dhabi. But there was no guaranteeDubai World is a
limited liability company owned by the Dubai government. The
expectation that Abu Dhabi would rescue foreign investors was just
idle hope.
Along with worldwide share market falls, the immediate effect of
the Dubai default has been a surge in the insurance costs for
national borrowings, especially by poorer countries. That cost is
represented in the price of credit default swaps (CDS) on government
bond issues. Greek CDS costs in particular have skyrocketed, raising
fears that Greece, with public debt levels at a staggering 130
percent of GDP, will follow Dubai within weeks. CDS costs for Hungary
have also soared since Wednesday, and there have been CDS price
increases of about 11 percent for Malaysia, South Korea and Qatar.
These developments are by no means unforseen. Rather, the Dubai
default is a lit match for ready-to-burn tinder, namely global
sovereign debt levels. The key response of capitalist institutions
to the global financial crisis has been to transform the toxic debts
and unsustainable borrowings of private institutions into public
debt via bail outs, guarantees and other stop-gap mechanisms.
According to new estimates by Moodys, the credit rating agency, the
total stock of sovereign debt worldwide will have risen by nearly
50 percent between 2007 and 2010 to $15.3 trillion.
This ballooning of sovereign debt has been so fast and so immense
that there is little chance of debtor governments, mired in
unemployment and low growth, repaying either in the short or long
term. As borrowing costs increase because of the perception of
increased default risk (also called long tail risk), the situation
for indebted countries becomes worse. Global funds available for
such borrowings are also drying up. While Greece, Hungary, Latvia,
Estonia and Turkey are at the top of the global watchlist, default
is also an eventual likelihood for the United States, which has
public debts of $12 trillion. The key difference between the United
States and smaller states, in this regard, is that the US is currently
deemed by its bondholders, including the Chinese government, as too
big to fail.
The Dubai default also pierces claims that allegedly well-managed
and well-regulated national portions of the world economy can escape
the effects and aftershocks of the financial crisis. Government and
the corporate press have claimed that Australia, for example, is
immune. But it is now likely that DP Worlds Australian portsa
substantial piece of that countrys infrastructure, currently worth
$1.5 billionwill have to be sold in the near future. Early reports
indicate that there is unlikely to be strong interest and there may
be no buyers. Few local companies have funds of that scale to invest
in what is now, in the context of an uncertain future for global
trade, a very risky asset.
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