Asking to delay repayment on your debt – or defaulting, as the world’s press is carefully not calling it – has turned out not to be a good way for Dubai’s Sheikh Mohammed to win friends and influence lenders to Nakheel, the property arm of the state-owned conglomerate Dubai World. Markets have tumbled worldwide; investors, reminded that governments can be subprime too, have dumped the debt of other dodgy-looking economies (including Greece); and in Dubai… everyone is on holiday.
What is surprising here is not that Dubai is on the verge of default. It is that anyone was willing to lend them ludicrous sums of money in the first place. Calculated Risk points out that Sir Win Bischoff, then at the (US) state-controlled Citi and now, appropriately enough, at the (British) state-controlled Lloyds Banking Group, was raving about raising $8bn of loans for Dubai last year and as recently as December chose to go public with a “positive outlook on Dubai”. Another non-surprise: state-controlled Royal Bank of Scotland was Dubai World’s biggest loan arranger. In the UK, Dubai World has been buying up a long list of property, according to Anita Likus at The Source; the assumption is it will shortly be selling.
I’m having déjà vu here. How could the bankers get it so wrong? In the case of the global property bubble, I have some sympathy for their “everything is different this time round” view (actually, no I don’t). But in the case of Dubai, it wasn’t just obvious to the top hedge fund managers and occasional economist who spotted the subprime crisis brewing. It should have been glaringly obvious to everyone: building a ski resort in a desert where temperatures often top 45 degrees centigrade, reclaiming islands from the sea to build super-luxury apartments and installing chilled swimming pools just made no sense, as Jim Krane pointed out in the FT this morning.
The super-rich footballers and movie stars who bought the apartments set up yet another example of the madness of crowds as ordinary punters were convinced – by the property developers – of Dubai’s story: it could become a holiday resort for the world’s wealthy, justifying the insane sums spent on architectural fantasies. On top of that, oil-rich Abu Dhabi was expected to bail out Dubai if the unthinkable happened.
Now the unthinkable has happened, and Abu Dhabi held back. It could still step in – indeed, Jeremy Gaunt at Reuters thinks other rich regional states might want to help out too – but the question has to be asked: could there be more bubbles to burst? Actually, the question is not whether, just: where is next? The Agonist thinks it is the US: big debts, enormous income disparity between the huddled masses (Latinos in this case, rather than imported south Asian workers in Dubai), and, in the case of the US, no rich uncle in Abu Dhabi. I’m not sure the parallel works that well, but the fear that US Treasuries could be devalued through a debasement of the dollar is valid – with the debasement already well under way. China, of course, is another popular target for would-be bubble-bursters, with Morgan Stanley predicting this week that Shanghai’s stock market bubble will pop next year.
The problem, as ever, is the madness of crowds (full book here on Google Books, for anyone who needs a refresher). Fidelity’s Anthony Bolton said it nicely on FT.com yesterday:
“As everyone knows, a bubble is a market that rises rapidly in which one is not invested; if one is invested, then it is a bull market.” I have sympathy with this view and I believe that, like bull markets, bubbles normally continue for several years.
He drew the opposite conclusion to Morgan Stanley: investing in China is a good idea, to take advantage of the growing bubble. The soaring gold price shows how many investors share my scepticism and are on the fear side of the greed and fear scale.