After Dubai


by Dave Osler    
2:35 pm - December 2nd 2009

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Sovereign default is basically the posh name for what happens when a country says it can no longer meet repayments for the 545% APR doorstep loan it took out from Provident Financial.

But here’s the good bit; in these cases, the friendly neighbourhood bloodsuckers can’t exactly send round the bailiffs to take away the telly and the stereo. So what do they do? Hold a whipround for the victim instead, and write off large chunks of what is outstanding.

Would that Britain’s poor were treated the same way as Mexico in 1982, Russia in 1998 or Argentina in 2002. The real surprise is that states don’t try it on more often than they do.

There are downsides to default, of course. While defaulters have often been able to reaccess international capital markets soon enough, they will of course pay a higher risk premium. Their ability to issue bonds in domestic currency will be reduced, thereby increasing vulnerability to currency risk. Loss of trade finance may also mean that defaulters will see a reduction in international trade.

The trick is to weigh up the loss of income that may arise in such circumstances against the cost of servicing the debt. In other words, it may be that default is the rational strategy for some countries in some situations.

Technically speaking, Dubai is not yet in default, but is simply asking for more time to come up with some $59bn in ready cash, a move one suspects would not work particularly well on the average sink estate.

Oddly enough, I haven’t heard anyone on the left raise the slogan ‘cancel the debt’. Dubai is not exactly your average Heavily Indebted Poor Country, to use the technical term for what non-economists refer to as basket cases. Sheikh Mo and his string of racehorses evidently do not inspire compassion in quite the same manner as starving Ethiopians.

The question is, what impact will his shock request for a moratorium have on the capitalist system internationally? Different pundits are offering us different takes. The pessimists adhere to the neoliberal equivalent of the old Cold War domino theory, and argue that 2010 will see a string of countries going bust, perhaps precipitating a double dip recession.

Greece is being mentioned as a contender here, despite denials from the Min of Fin in Athens that this is on the cards. But if the recently-elected centre-left PASOK government attempts to implement serious austerity measures in a country with a sizeable far left and militant trade unions, the political implications could be dramatic.

The optimist case is that what happened in Dubai is the bursting of a good old fashioned property bubble, with the fact that the main property developer turns out to be owned by the state deemed not to be of particular importance.

Nobody knows for certain, of course. Both arguments depend on estimates of the unquantifiable. But what was interesting to me about the Dubai crisis – or perhaps we should call it the Dubai mini-crisis – was the way it caught even the most prestigious commentators by surprise.

In hindsight, a number of signs of what were coming were evident several months ago. But they were ignored by many of the very people who should have been on the case. The moral for everyone else is to expect the unexpected.

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About the author
Dave Osler is a regular contributor. He is a British journalist and author, ex-punk and ex-Trot. Also at: Dave's Part
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Story Filed Under: Blog ,Economy ,Middle East


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Reader comments


1. john b

Slightly pedantic point: the money that’s defaulted / “asking for more time”-ed isn’t sovereign debt, it’s un-guaranteed debt of limited liability companies, secured against property assets. Just as shareholders in general aren’t on the hook for more than their equity, nor is the Dubai government here.

Less pedantic point: there are an enormous number of ways in which Britain’s poor can stave off the baliffs if they’re in a similar situation. Pretty much everyone who ends up with the telly carted off and the locks changed could have avoided it if they’d known about the assorted ways of escaping/rescheduling/writing down etc debt agreements.

If anyone reading this has debt problems, then go to the Citizens Advice Bureau right away, and you’ll most likely escape with your things intact. If you ignore the problem and hope it’ll go away, only then are you likely to have Very Bad Things happen.

2. cjcjc

The only aspect of the mini-crisis which caught anyone out was the refusal of Abu Dhabi to bail out Dubai, which it can easily afford to do, if it wants to…

So if the “prestigious” commentators made a mistake it was to do with the internal politics of the UAE, nothing to do with the economics.

3. Andy Jarm

“There are downsides to default, of course”

What planet are you on?! A default on UK debt – or merely the slightest perception by the markets that one might occur in the distant future – would cause a collapse in sterling. For a country that has to important practically everything, including almost all of its food, fuel and essential goods this mean a catastrophic drop in living standards for ordinary people overnight.

4. Lex

@cjcjc

Do you (or any other readers) know of any good analyses of current UAE internal politics, wouldn’t mind reading up on it. Thanks in advance.


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  1. Liberal Conspiracy

    :: After Dubai http://bit.ly/6n9lLD





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