Dubai’s Financial Sandstorm, Tip of Iceberg?
The news of rescheduling of interest payments on US $ 28 billion debt of Dubai World & Nakheen group came as a shock to the still fledgling global economy. Just when green shoots were claimed to be visible and feel of recession getting over in few countries was being talked about, the news from the unexpected quarters rattled the world for a day or two. As the details came out and bail out plans from Abu Dhabi reassured the global investors, the dust settled down. But this gave a stark reminder to the economists and financial institutions of the vulnerability of such shock waves. Has the world taken a lesson from the global melt down of 2008 starting with Lehman Brothers and its fall out? At least in some aspects it seems there is a scope for picking up threads and putting an early warning system for potential triggers for financial catastrophes waiting to happen. It is obvious that the UAE government, Dubai World & Nakheen all were in the knowledge of the potential defaults and need to restructure their portfolios. They were on the brink of collapse and must have been trying hard to avoid a repayment default. Obviously it was kept under the wraps to void any unwarranted impact of financial markets and credibility of the economic driver in the Middle East. Now the UAE government has distanced itself from the Dubai World crisis. This disassociation hints at disowning any potential crisis in other government run companies. This helped a “stable” rating by Moody’s for UAE & Abu Dhabi governments. S&P have downgraded credit rating of Dubai World related government companies to junk status. It is sad & unprecedented that when these companies borrowed the funds in billions of dollars, they were perceived to be government backed companies and now that they have been “disowned” by the government, they are reduced to junk status. What was the basis for granting huge loans without adequate security or sovereign guarantee? In a country with national debt of $ 100 billion, only two entities accounted for 80% debt. How can the government distance itself from such huge commitments? If the loan repayments on debts of billions of dollars were not guaranteed by the government of UAE, then it is the case of over leveraging the mere
government status by the banks ever eager to lend money. That is not prudent banking. This is reflection of “Value Management Deficiency Syndrome”. This leaves the companies’ rating reduced to junk status. Can this phenomenon extend to public sector or government run companies in other countries making borrowers suddenly vulnerable? Have Indian public sector companies adequately secured their debts? There could be a number of situations around the world which are potential time bombs of financial defaults. The credit rating agencies are sitting on a pile of information on potential defaulters. There would be umpteen number of securities created on presumptive backings giving false derived sense of security to investors and have potential of triggering a financial disaster. Most of securities have ratings from reputed rating agencies which are privy to such detailed information on instruments of investments globally. Now Moody’s have moved debts of certain Dubai companies on “watch” rating. But this has been done only when the cat has come out of the bag. What is required is a classification of such potentially explosive instruments in a different category with a red flag from the beginning so that the investors have accurate perception of risk involved. The global community can not afford a slide back on the gains of financial stimuli all over the world. Japan has just announced another massive stimuli of US $ 114 billion. Dubai episode has given a strong message of unlikely V recovery with increased possibility of W pattern of recovery. So it is necessary to brace for potential reversals on the way up. To ward off any potential disasters in near future, all the rating agencies should put together a list of say 100 top potential large value ( billion dollar plus) instruments which could be closely monitored by international agencies like International Organization of Securities Commissions to reduce the risk of global failure. If there was no immediate clarification from UAE / Abu Dhabi governments or Dubai companies on plan B to make repayments and to reschedule their debts, the global markets would have been adversely affected. The interests of the global investors have to be protected by proactive measures and early warning systems with closer coordination between different countries.
In India, Securities & Exchange Commission of India (SEBI) and RBI should prepare such international list of potential triggers with or without India’s stakes if any. A band width of variations permitted should be fixed after detailed analysis for each variable impacting on the risk associated with each instrument. We should have our own early warning system so that our investors are protected and exposure to such risk is safeguarded. The warning signals should be discreetly used and shared with key stake holders so as not to upset the markets and yet play on safer side. “Value Management Deficiency Syndrome” is again rearing its head in global financial markets and we better watch out for symptoms well in time for constructive response to save the situations. Vijay M. Deshpande Corporate Advisor, Strategic Management Initiative Pune December 4, 2009 Scroll down for my other blogs Or visit www.strami.com