The default of Dubai World – announced on Thanksgiving Day, when most Americans were on holiday – showed us what the second leg of this great crisis was all about.
The financial markets’ reaction indicated that many believed that, rather than being an isolated incident, this default in Dubai – for so long, the poster boy of globalisation – might be the beginning of a new domino effect of defaults all around the exposed parts of the world.
I say ‘exposed’ parts of the world because a new trend is developing, as the ramifications of the great 2008 crash become more evident. We are moving into a phase where the relative position of companies and countries is being closely looked at.
In the crisis, a ‘blanket’ rescue operation was mounted – the good and the bad were treated with equal generosity. The world’s central banks, because they were worried about systemic risk – which is a complicated way of saying ‘‘the bad boys will drag down the good boys’’ – treated everyone the same. Money was printed and thrown at everyone, everywhere, in the hope that the system would not seize up.
Now that the system has been saved – or at least looks more robust than many imagined possible this time last year – it is time to become more discriminating. Financial history reveals that all economic crises go through various stages.
Typically, there are periods of calm, when people think the worst is over and then, wham, something else happens, triggering another decline. In the discriminating as opposed to the blanket phase, investors consider who is really delinquent and who can be salvaged.
This time around, the discriminating phase has been made all the more acute by the fact that the central banks – and the ECB in particular – have warned the fragile banks that the taps will be turned off soon.
The realisation of this in Greece last week caused a huge sell-off in the stock market there. No one seems to have reminded us that the Irish banks are much more dependent on the ECB’s daily largesse than the Greeks.
It is ridiculous to think that countries and companies carrying huge debts, borrowed in the good times, will be able to pay them all. There are a few hard rules of economics, one of which is that debts that can’t be paid won’t be paid. The sooner the creditors realise this, the better for everyone.
All over the world, borrowers are doing deals with lenders to restructure debts. Many major companies – Independent News & Media is an Irish example – have done debt/equity swaps with creditors, giving them shares instead of cash, thus ensuring that the company, its creditors and existing shareholders live to fight another day.
This is what adults do in a crisis: they make the best deal possible. Only fanatics carry on as if nothing has happened, promising to honour all debts and never to renegotiate. So when we hear our government suggesting that our crippled taxpayers can pay all the debts incurred by our bankers, the world knows we are spoofing.
This type of behaviour scares people, and leads to capital flight. When capital leaves a country, it doesn’t come back until there is an event that signals that the game has changed and the boil has been lanced.
One event would be a change in the management at the top of the banks. It is hard to overestimate the damage that has been done by the failure to appoint outsiders to the top positions of our banks.
I was chatting to a serious investor from New York the other day who despaired of the situation. Two years into the problem, we have no new management and the only outsider in the Irish banking scene is the new boss of Anglo, who was brought in after nationalisation.
Next year, there is likely to be a significant re-rating of countries and companies.
What the Dubai default indicates is that the bond market was asleep. It didn’t see this coming. Dubai, like Ireland, went on a binge over the past ten years, using other people’s money to build whatever and wherever it could. Now Dubai can’t pay it back.
Let’s just do some back of the envelope calculations for Ireland to see whether we are hurtling down the Dubai route. How much money do we owe and how will the financial markets regard us next year – particularly after the Dubai default?
Let’s start with the banks. Last year, they borrowed €135billion abroad to fund their lending here. With ECB help in the past year, flogging a few assets, the figure probably stands at about €120 billion. Government debt, according to the National Treasury Management Agency, stands at €73 billion.
Together that is €208 billion; being generous we can call it €200 billion. Averaging interest at 5 per cent means the interest payment on this is €10 billion per annum. In the past few months, when millions seem to have slipped into billions, and nobody can grasp how big the number is, let’s just remind ourselves that €10 billion is enough to build nine Luas lines in our cities or enough to give every worker in the country a pay rise of €90 a week.
Remember this €10 billion is just the interest to be paid every year. The principal may have to be repaid eventually too.
But the people repaying this €10 billion each year are also the people paying interest on their own debts, because private sector debt stands at €378 billion.
Again, allowing 5 per cent interest (but it is probably higher in most cases), this leads to annual interest payments of €18.9 billion – 17 Luas lines and €170.10 per worker in the economy per week. Presuming that the interest payments on the private debt are covering the banks’ debt, we can add the €378 billion of private sector debts to the national debt of €73 billion and now add Nama loans of €54 billion just for good measure.
This gives us a total debt of €505 billion Once again, allowing for 5 per cent interest, we get total interest payments that have to be generated from Ireland every year of €25.1 billion per annum. That’s how much cash will leave the country in interest payments on loans next year.
This means that the first €225 earned by every worker every week in this country will be earned simply to pay the huge debts. Now what are we going to do about this? With these figures, default is obviously on the horizon.
Should we renegotiate now or allow the thing to blow up like Dubai? I can’t answer this, but it’s interesting to see what the Bible has to say. The Bible reveals that debt cycles, defaults and debtors getting into trouble are stories that are as old as the hills. In Deuteronomy, chapter 15, verses 1 and 2, the Bible says: “At the end of every seven years thou shalt make a release . . . Every creditor that lendeth unto his neighbour shall release it; he shall not exact it of his neighbour or of his brother because it is called the Lord’s release.”
At least if we do ’fess up and begin to renegotiate our debts, we might have the consolation of knowing that God is on our side.
David – If we’re getting all biblical, I think the times call for a Leviticus 25, not just a Deuteronomy 15, i.e. a Sabbath of Sabbath years, a super-debt-release jubilee. “Consecrate the fiftieth year and proclaim liberty throughout the land to all its inhabitants… If you sell land to one of your countrymen or buy any from him, do not take advantage of each other… If one of your countrymen becomes poor and is unable to support himself among you, help him as you would an alien or a temporary resident, so he can continue to live among you. Do… Read more »
The world will be in financial crisis until the leading cause of this crisis – the United States – gets its house in order. The United States cannot afford th war in Afghanistan. The money spent in Afghanistan in one year would be better spent on a new defense strategy and on the recovery of the US economy. Here’s what the US needs to do: – Redefine the mission of the US military to defend national territory and vital interests abroad through means that are financed through taxation and domestic borrowing, not through foreign borrowing. – No troops on foreign… Read more »
€500B resting in a “high yield” savings account (say, 5%?) would in theory generate about €2.85M ever HOUR.
Unfortunately the “Bertie and Dubai” youtube video linked on GavinsBlog that I posted in the previous article has mysteriously been deleted by the video’s owner, branddubai…
Thankfully, the internets come to the rescue. Get it while its hot:
http://www.irishcentral.com/opinion/col/kellyscorner/Bertie-Ahern-lauds-Dubai-as-a-succes-78090192.html
Christmas Crib in The Desert : David has put together a christmas crib . He has the setting in the desert , with a Donkey ( NAMA -neidin) a Camel ( Removal Truck — nadeen) , Wise Men ( Investors) ,Crib ( Ireland Inc ) Jesus ( Allah — forgiveness of debts ) and B&B and main parties ( those Inns that have refused tax payers refuge ) . There are the stars overhead because that is what attracts the investors but B&B seem to have blurred them a bit .There are Animals in the crib too ( Irish Banks… Read more »
The Ghost of Dubai : BCCI Bank of Credit and Commerce International disappeared in the 90’s and was effectively the private bank of the rulers in Middle East .It ended in serious embarrassment and a significant cost that is today still been underwritten .It was on many high streets in London and the Isle of Man and in Luxembourg as well in many cities in the middle east. It was build on sand and had a facade of illusions like mirages in the desert and appointed proxies from elsewhere as Board of Directors to create false sense of security .… Read more »
I am reminded of the following when I read of Bertie opening his mouth once again:
“Better to be thought of as a fool, than open one’s mouth and have it confirmed”
Having read this article, I am in no doubt that Ireland will not be able to pay its debts. It’s staggering the amount of government and private debt. There is no comeback from this.
Time to admit bankruptcy, ditch the euro, get politicians who let this happen to resign immediately. Let banks fail. Start again
Twisted Fate :
Look at an Arab Financier straight in the eye and your head will fall off .That is why the knife has a curve to be acted on from behind ….and discretely.
Irelands new Triple BBB rating: Bemoaners; Begrudgers and Buggerers>
Hi David, You touch on a few interesting items in this article. The Dubai story is a classic example where the human failings of excessive greed has played out and put an area in a country that is wealth-generative (through its natural Oil and gas resources) into unnecessary trouble. The development path of Dubai and UAE is amazing. About the time you and I were born in the 60’s David, UAE had less than 100,000 people! Today it has 6 million, most of them non-Arab immigrants. So it is a place on nearly a constant boom growth trajectory. They were… Read more »
El Hamdu-lillah,
Just as we establish ourselves as a prime example of the putative financial and moral bankruptcy of the West, a beacon of hope appears from the parched deserts of the Middle East. This time it is not in the form of a bearded gentleman carrying a cross but as a financial approach based on the sukuk:
http://business.timesonline.co.uk/tol/business/markets/the_gulf/article6934074.ece
Much of the baggage that comes with it is reprehensible to western minds, but its logic bears closer examination.
Alas, the penny drops. Frightening figures David. Even more frightening when you add future obligations. Public sector pensions for example. I reckon €700 billion or there abouts for all debt that has been given to the taxpayer as a liability. The government knows well but It doesn’t have the balls to do anything except keep the status quo and hope the problem goes away. When you mention doing deals we don’t have any assets left as they were all given away by our corrupt Government. The average person on the street doesn’t know how many zeros there are in a… Read more »
€10 Billion a year in interest?? Just another reason why I plan to immigrate / (leave a sinking ship)!
€10 Billion a year in interest?? Just another reason why I plan to Emigrate / (leave a sinking ship)!
Inshallah Bukrah – God is Great ………and with a good camel the debts are delivered far away so far away they just burn up under the sun.Just like doobee doobee dooo
Thats all folks Dubye
I am watching a bondtrader discussing Dubai on TV . Its all fine . Investers will get a haircut , drawing a line under debt , it will be fair , investors will not be put off investing in The EUA in the future ,
In short its not the end of the world for Dubai . Ireland on the other hand is bailing out everybody.
Does anyone agree with me That its almost I.M.F O’clock and if so what month will they come in on? I’m guessing March.
Is is better for us in the long run?
Thought that this may be of greater interest than laughing at ex- Taosigh: http://www.youtube.com/watch?v=c5tN-U6DDvA
As Dubai was a spatial fix like many more besides would it not be better looking at Capital by Karl Marx than the Bible by a load of nutters?
http://opus.kobv.de/ubp/volltexte/2008/2436/pdf/gr2_01_Ess02.pdf
Bertie in his recent praises of Dubai should do a bit of reading, wondered if he was paid for his pronouncements, it’s all he seems to be doing, getting paid for talking, not too different to his time as Taoiseach!
Dark Side of Dubai
http://www.independent.co.uk/opinion/commentators/johann-hari/the-dark-side-of-dubai-1664368.html
A morally bankrupt dictatorship built by slave labour society
http://www.independent.co.uk/opinion/commentators/johann-hari/johann-hari-a-morally-bankrupt-dictatorship-built-by-slave-labour-1828754.html
subscribe.
Goodbye Dubai.
http://online.wsj.com/article/SB10001424052748703939404574567722196901150.html?mod=googlenews_wsj
I think Cowen should install an electric telephone that just dips the cable wire into the sand in his office …and employing a royal camel to offload the financial shit deposited at the Dept of Finance and take it far away in humps to be dumped far far away.That might give him a real neck .
He can rescind all financial commitments by Irish Taxpayers then
I accept that bailouts, Ireland’s debt and repayments are all important, but surely employment is the pressing issue if we want to increase government revenue from taxation (direct & indirect) and get consumption going. I have seen no action from the government on this, no public announcements/measures etc – people in their hundreds of thousands are sitting at home watching their lives slip away, we need action, and we need it now. Paul Krugman comments on the obvious in today’s New York Times, the full article is worth reading: “Yes, the recession is probably over in a technical sense, but… Read more »
I just wonder…..Is there anything in Dubai covered by NAMA. It seems that the D4 banks were giving loans everywhere, overvalued hotels in London, houses below the high water mark in Carrick-on-Shannon, penthouses in Manhattan, waterlogged fields in Kildare, apartments in Sunny Beach Blugaria, golf club memberships in Andalucia, student flats in Leeds, shoeboxes in Islandbridge, retail space in Nenagh…. …surely an Irish bank manager somewhere thought that Dubai offerred “investment opportunities” equal to any of the above ?? I read your article yesterday in the SBP and it was very good. But my first thought of the biblical analogy… Read more »
The Dubai debt de fault is a Scam. A diversion tactic too take peoples eye of the real news story which is the NWO ‘earth government’ formation at Copenhagen. As the corporate interests wheel out the next POnzi Scam they have the rest of us completely pre occupied with the controlled demolition of the Banks POnzi property buble. For anyone who wants to catch up on the real News now, not the scam mainstream news been feed as opiate to the sheeple get informed NOW on CLIMATEGATE. Heres a link that provides all the links needed. Dubai is a ‘look… Read more »
POsters:
The Dubai de fault is to bury CLIMATEGATE as a NEWS story.
So, this means CLIMATEGATE is a threat too NWO’s pinky and the brain COpenhagen conspiracy.
The only solution is to emigrate. Ireland voted in fools and got what it deserved. Hard-working tax payers get screwed, young people who worked and bought during the boom, foolish as they may have been, at least worked and paid taxes. Many contributers to society are left wondering how to maintain a roof over their heads. http://www.independent.ie/national-news/outcry-over-councils-83643m-bill-to-house-six-traveller-families-1958626.html In 2002, I said to my parents (somewhat jokingly), that the best way for me to get a roof over my head was to quit my job, take up a drug habit and maybe get some unemployed girl pregnant. Deciding that this wasn’t… Read more »
Dubai is a mock up story as part of the global elites hail mary pass run for the copenhagen NWO touch down.
[…] Debt in the desert shows how we must not proceed | David McWilliams BCCI Bank of Credit and Commerce International disappeared in the 90’s and was effectively the private bank of the rulers in Middle East .It ended in serious embarrassment and a significant cost that is today still been underwritten . ….. a) ‘Ireland’ owns offshore assets, either through private citizens or the loans of it’s banks See the original post: Debt in the desert shows how we must not proceed | David McWilliams […]
Folks, I am trying to finish reading David’s book, “Follow The Money” and I am seeing your influences in it, if I’m not mistaken; some words, concepts, phrases that you have written here are resonnating with me as I read. I really think that contributions here are feeding into his writings and thought-processes. Contributing here is a very important thing to do. (anyone else reading it and thinking the same?) Anyhow, I cannot think of anything to add to your comments right now; you have it covered. The message of the article is what it is: another stark warning. The… Read more »
Malcolm – Abu Dhabi will bail out the soverign state of Dubai but will not bail out the deceptive ‘World’ of it’s creditors who are veiled away like their women thus the State of Dubai has shielded itself with a’ twisted fate dagger’.’World’ is written in the sand enjoying more than a limited exposure and NO GUARANTEES from the state.It’s a cordless cable electric telephone.
Dubai and Ireland can only be compared to a level the difference being in Dubai they have had a more clear plan of where they want to be , sure the construction may be done by Indians and Philippines and the labour conditions may seem harsh in comparison to standards here in Europe , yet what these construction workers earn is still higher than in their own countries. Sure your liberals will tell you they are housed in terrible conditions but get real the Irish navy had it no different in England in the 1950’s and did we pay our… Read more »
[…] Fanatics By Ciaran David McWilliams’ column in this week’s Sunday Business Post is well worth a look here. […]
Well now lets see how best to explain the decision to default from past experience. The whole thing is a bit like trench warfare from the first world war. The powers that be will not default or surrender but will remain fanatical in their belief’s so long as their own position does not become untenable and they run the risk of being overrun, or suffer personal loss. So long as there are enough taxpayers and others available to send over the top, then the economic war will continue. The type of carnage that was reported from WW1 in Flanders etc.… Read more »
Posters:
Watching FRONTLINE RTE 1 and this ESB malarky releasing some of the waters is sounding more and more hollow and suspicious and i cannot keep thinking here is the new SHOCK DOCTRINE Ireland in action.
Why did the army stay in barracks sitting on ar$es?
This ‘rainfall’ is been used to sell the manmade global warming Scam too the ‘hick’ irish in the midland and then put through the meeja as a black op’s/
Posters:
On meeja to – day, NAMA re fixing write downs on BoI toxic debts from 18% too 25% requiring an xtra billion euros capital bulk up from the taxpayer.
Tucked away 7th news item to night.
The irish people now are so swamped out by the ruling powers monopoly money gaming on the bond issuance of the country that people are nubed in confusion.
Posters:
FF lost Jim’s support to- day. FF are decimating their base support across Ireland he said to – day.
Is he right?
Are FF finished?
Folks, I think I can contribute this:
http://www.huffingtonpost.com/nassim-nicholas-taleb/good-bye-the-reappointmen_b_374576.html
Nation Calls :
Where are :
Furrylugs
Andrew Mooney
Josey
Paul O’ Mahony ( Cork)
Huff & Puff
et al cannot remember the others
Tim & Deco have reduced their contributions so vroom vroom in more
We need more contributors to Christmas …..so please join in.
interesting link re living euroland
http://www.smh.com.au/business/some-euro-zone-prisoners-could-break-free-20091130-k1bf.html
also on climate gate, we all know chinese and russians change the weather when they’ve got a big parade or an olympics, guess americans, british, french and germans can do it as well. probably not an exact science but i wouldn’t rule it out, maybe the storms were meant to hit so where else?
have a listen to this on how they plan to reflect more sun using whiter clouds Sean Twomey Effect
http://www.bbc.co.uk/programmes/p0053drb
Hi Deco, Deco> that entire ‘build and they will come’ philosophy, while driven by noble top level aspirations is built of a lack of a real business plan. But hey at least the Sheikh of Dubai had a plan. And the Sheikh has real buildings in Dubai. But any country that develops too much ‘infrastucture’/housing/property using excessive levels of credit, and where the output is not utilised nor commercially viable is just a bubble that has to burst. Granted, Dubai’s family controlled government and central planning meant that the small city-emirate could be planned from a master blueprint plan rather… Read more »
MK 1 – I concur
Dubai : Lost Golden Civilisations in the sand to BCCI ( Bank Credit and Commerce International ( Scandal) to Dubai World collapse Ireland Munster Bank ( pre-aib ) ( default on shareholders and depositors ) to AIB ( 80’s default on taxpayer ) to Anbasher Bank ( default on depositors ) to Anglo Irish ( default on shareholders and taxpayers ) to AIB ( again ) ( default on shareholders and taxpayers ) to B of Irl ( default on shareholders and taxpayers ) to more to arrive Do you know that the former bank Munster & Leinster ( pre… Read more »
Aussies are leading the way in the common sense stakes.
Australia’s opposition Liberal Party has elected a climate-change sceptic as its new leader, dealing a blow to the government’s carbon-trading law plans.
http://news.bbc.co.uk/1/hi/world/asia-pacific/8387653.stm
The current record price of gold and talk of Indian labourers in Dubai got me thinking. Currently, India is a net Importer of Gold – India’s gold imports in November 2009 fell sharply to 16 metric tons from 34 tons a year earlier due to record high prices, a senior industry official said Monday. We in Ireland have many do-gooder agencies like GOAL, who are besieging us to part with what little few euros we have left. Among GOAL’s many projects is the provision of clean water at 42 schools in Calcutta. http://www.goal.ie/about/GOALHIGHLIGHTSAUTUMN2009.pdf Can anyone answer me, why are Irish… Read more »
Folks, this from Dermot Casey (review of O’Toole’s book, mentioning DMcW’s book “Follow the Money” and illuminating many issues of interest to us here: As I started to read Fintan O’Toole’s “Ship of Fools” I grabbed a stack of Post-it notes to mark interesting passages and key points for easy reference later. The trouble is, after 40 pages it became clear that marking ever page, or every other page, was not a good way to go back to reading the key points. And that’s what it was becoming, with revelations on each and every page of fraud, deception and corruption,… Read more »
Colin , it’s because we Irish are so easygoing and laid back that we just let anyone take advantage of us.
No public sector pay cuts………ah well at least we won’t have to pay them for their extra 12 day’s holiday…..! Let’s just suffer when they are all off together………ah sure that’s ok.
gombeen f**#ing government.
All them billions in debt and they’re taking more time off. how many days unpaid leave equals 22 billion?
http://uk.news.yahoo.com/22/20091201/tts-uk-ireland-budget-unions-ca02f96.html
what does cowen think he is running?
wills, we are approaching the “Crunch” on this slow-moving-train-crash.
It’s gonna hurt alotta people.
Many will arrive here, I think, needing “treatment” (expressing anger and seeking understanding).
Let’s keep at it!
John ALLEN, if you ask my assistance in contacting Paul O’Mahony in person, I can supply same. (I trust that you already know how to contact me….).