Across the world, a number of previously autonomous republics are being forced
to swallow their pride in the wake of the unfurling economic crisis. Often the
cost of a bailout from a rich neighbor has been political accommodation, but
even here shifts are only just beginning.
One of the more interesting stories deals with Dubai, the previously sleepy
smugglers' port in the United Arab Emirates (UAE) that suddenly had aspirations
to global dominance, as exemplified by the Burj Dubai, the world's tallest
building (as an aside, building the world's tallest building almost always
condemns the country to an economic downturn; the skyscraper curse is not urban
Anyway, for a country with global aspirations and supposedly
US$100 billion in asset values through the stock and property markets, Dubai
found it well-nigh impossible to fund the ruling family's hobby horses in
banks, hotels and ports around the world, not to mention the real-estate boom
that has been ongoing from 2002.
The ruling al-Maktoum family of Dubai reportedly approached their cousins, the
al-Zayed family, running Abu Dhabi, for terms of a bailout. Initial
conversations were allegedly heated, with the latter demanding that Dubai hand
over control of its iconic airline, Emirates, as well as stakes in its biggest
property firms, including Emaar and even Dubai Holdings (the ruling family's
in-house collection of vanity businesses). With oil prices down and nursing its
own losses on ill-fated investments in American and European financial firms in
2008, the al-Zayed family was reportedly not very keen on being on the
delivering side of charity.
There were unsubstantiated rumors that both Iran and Saudi Arabia had sent out
feelers to Dubai over the terms of a rescue, which galvanized Abu Dhabi into
swift action after weeks of dilly dallying. It is not very surprising that a
country such as Iran, even on the brink of its own economic collapse, would
countenance a bold move to intervene in Dubai's financial mess, albeit for
reasons entirely removed from finance.
The more puritanical rulers of Abu Dhabi now control a greater proportion of
the UAE federation, after subscribing to $10 billion of a bond issue launched
by the Dubai government this week. With the property market looking to face a
multi-year slowdown and its banks beaten down by losses on global investments,
it is highly likely that Dubai will default on the terms of this bond, among
others over the next five years or so, in turn providing even more control to
Abu Dhabi directly.
Germany as the new IMF
Typically, countries that find themselves in the midst of an external financing
crisis would tend to approach the International Monetary Fund (IMF), which
would in turn impose a bunch of nonsensical "austerity" measures, engineer
relative poverty to the country's immediate neighbors and thereby create
conditions for an export-led recovery.
In almost every such case, neighbors that lost an export edge would soon find
themselves in a precarious balance of payments problem and then soon enough
approach the IMF. In this way, the IMF and the World Bank - the evil twins of
global finance - managed to maintain relevance particularly in parts of the
world such as Latin America and Africa.
The good news in the current crisis is that the IMF itself has run out of
ammunition, and that before any major debtor nation has been pushed to
bankruptcy. The multilateral institution has a paltry $200 billion in
firepower, barely enough to save a handful of the most affected countries (for
example Ireland, Iceland, Hungary, Ukraine, Turkey) let alone the bigger
economies now lurching into a permanent downward spiral such as Japan, Italy,
Spain and France.
Realizing this, the European Union has proposed that the IMF capacity be raised
to $500 billion, although aside from Japan with its contribution of $100
billion, it is difficult to see any other "donor" country with the financial
capacity to actually help the IMF. In particular, the idea will be deeply
unpopular in Washington, given the spate of personnel changes that embarrassed
Republicans no end; similarly other supposed donors like Britain and France
will probably need their own bailouts soon enough.
Late last year, I wrote that the sheer size of the banking system in various
European countries relative to their gross domestic product, as well as the
extremely low recovery rates on various asset categories, simply meant that the
countries offering explicit guarantees on their banking system's deposits would
themselves need external assistance sooner than later. (see
Europe's death by guarantee (Asia Times Online, October 11, 2008). This
is now happening in the case of countries as diverse as Ireland, Portugal,
Greece and the United Kingdom among others.
Meanwhile, other European countries, including Austria, have suddenly found
another ticking time bomb in the shape of their banks' exposures to emerging
European countries. With two of its major banks in more than a spot of bother,
Austria had to escalate its own crisis-fighting measures, but finds a complete
absence of support from other members, including Germany, for any assistance to
Europe's "near abroad".
It must not come as a surprise to note that Europe's tilt towards the windmills
of global finance only happened after the declining feasibility of tapping the
European Investment Bank (EIB) became apparent. This institution, which
operates as a quiet instrument of European policy, has often been used to prop
up member states. The alarming decline of members like Italy, Ireland and
Greece has meant though that market reaction to the EIB proved highly skittish.
Credit default swap spreads widened to levels associated with the most risky of
European sovereigns, from their previous levels when the EIB had tended to
trade in line with the credit of Germany. This widening effectively removed the
EIB from the game of providing unremarked subsidies to member states.
In turn, this brings to mind a continent that is unable to act in the
collective best interest, instead sundered by selfish policy moves. As I wrote
last year, (see Utterly
pointless Europe, Asia Times Online, August 16, 2008), the inability to
face down the Russian threat on Georgia was but a simple indication of bigger
problems festering under the surface. With the recession, all these problems
have started coming to the fore.
With the IMF and the EIB without actual ability to rescue countries and the
common European mandate weakened by policy squabbles between the east (new EU
members formerly in the Soviet bloc), south (the property-market led bubble
economies of Greece, Spain et al) and the west (the troubled Old World of
France, the United Kingdom and Germany), there is but one hope for any country
facing down its creditors. That would be to secure bilateral assistance from
the region's sole solvent sovereign, namely Germany. Indeed, many European
government officials have already called on the country to issue an explicit
guarantee on the bond obligations of key member states, thankfully not to much
avail thus far.
The Germans, though, appear in a funny mood. With a dramatic drop in industrial
output going alongside the decline of its banking and insurance giants, there
is well-placed fear that xenophobia could raise its ugly head once again. The
comparison to Abu Dhabi is fairly straightforward: for all their wealth, the
Germans do not feel confident about their place in the world, nor indeed in the
likely forbearance of German citizens to further weakness in Europe. That would
elicit precisely nationalist moves but effected as pre-emptive gestures:
deporting a bunch of Turks or Poles to prove a point to the skinheads.
As the dust clears, it is highly possible that German influence on European
policy and institutions will have been strengthened due to the crisis rather
than weakened by it.
Power to the center
Elsewhere, the move towards tentative federalism has been halted in its tracks
by the crisis. A good example is provided by Scotland, where talk of an
independent country that splits with the United Kingdom but attains membership
of the EU and uses the euro rather than the pound sterling has died a quiet
death in recent weeks.
The reason isn't hard to fathom: the two main industries in Scotland were
banking and oil exploration and production. With the price of oil down a fair
bit and the main Scottish banks - RBS (Royal Bank of Scotland) and HBOS
(Halifax Bank of Scotland) both perilously close to being nationalized - there
is a sense of embarrassment all around that simply doesn't lend to
The banks were felled not so much by traditional "Scottish-style" lending of
the type that continues to be practiced successfully by the likes of HSBC, but
rather by the overexpansion associated with a nationalist pride: a desire in
effect for a Scottish institution or two to rise to the top of the world's
financial pile. The result has been quite the opposite.
British newspapers report that a furor over a BBC commentator calling Prime
Minister Gordon Brown a "one-eyed Scottish idiot" quickly fizzled out because
of the widely held belief that the premier in his previous job as chancellor of
the exchequer, or finance minister, had laid much of the foundations for the
United Kingdom's current crisis of confidence. Rather than drawing more
attention to the remark that was widely seen as a true depiction, the story was
quietly buried. What this does to his re-election chances later in the year is
anyone's guess, but many political pundits are now betting on a return to the
dominance of the English in all affairs British.
Then there is California. The nearly-bankrupt state had to corral its lawmakers
into a deal designed to rebalance its budget and open the state's access to
financing; however, even this deal may soon fail, leaving no alternative but
for the state to depend on Washington for a bailout. The state that proudly
bills itself as the world's eighth-largest economy is, in the absence of
Federal assistance, for all practical purposes bankrupt
Even that is the tip of the iceberg as US$2 trillion of municipal securities,
issued by various US towns and cities, head towards default by the year 2011.
In many of these cases, the only potential saviour is the federal government
itself. What all this means for the famously proud federal districts of America
and the political and cultural independence cherished by generations of people
in each of these towns and states, we do not yet know. All that we can surmise
is that Americans' sense of identity will likely face big changes in coming
months, all to the benefit of the center.
Whether it is the case of Dubai losing its independence to the ruling family of
Abu Dhabi or Germany taking charge of the EU directly, the imperative to
concentrate power in the hands of those with demonstrable financial capacity
will only increase in coming months.