I have not been posting much this week, as I have been busy, and also I had another attack of Doomer's block. Doomers block is what happens when you think, "I should write something in my blog" and so you look around the room trying to think of whimsical thoughts about kittens and so on, but what actually comes to mind is:
"Feck! Feck!" We're all doomed." And as my ex-boss at SAP, the nicest man who ever fired me once said.
"I do read your blog H, honestly I do, but there's only so much pain a man can take."
Well, what finally made me crack was the somewhat less than amazing news that Dubai has welched on it's debt. I mean seriously, who ever thought that building cramped, tacky, luxury villas on a sand bar in the middle of nowhere with a foul climate, and such poor infrastructure that the luxury beaches are actually open cast toilets, would turn out to be a bad idea. What could possibly go wrong?
Well, it turns out that cashflow is an issue, and Dubai ain't got any right now, so they are in big DooDoo, and in one of the biggest financial PR disasters I can recall, they dropped a bomb into the world's markets by casually announcing, as the markets closed for the local holiday, that they would be pushing back their debt payments from Dubai World by six months.
The three lead paragraphs from the London Times sum it up rather neatly.
"Fears of a dangerous new phase in the economic crisis swept around the globe yesterday as traders responded to the shock announcement that a debt-laden Dubai state corporation was unable to meet its interest bill.
Shares plunged, weak currencies were battered and more than £14 billion was wiped from the value of British banks on fears that they would be left nursing new losses.
Nervous traders transferred the focus of their anxieties from the risk of companies failing to the risk of nation states defaulting. Investors owed money by Mexico, Russia and Greece saw the price of insuring themselves against default rocket."
In other words, everyone started running around with their hair on fire, doing whatever they could to get out of this situation.
This is worrying, not because of the default of Dubai per se., but that fact that sovereign default is now looking like a real possibility. The bank's balance sheets have not recovered from the earlier losses. Standard and Poors gave a very chilling account of the state of the banks earlier this week.
If you look at the real core tier one assets of the banks, not including hybrid debts, then the picture of the world's banking health look very poor. UBS, which has the Spaceship's small amount of cash has a ratio of 2.2.% under this approach, when using a less conservative approach it claims to have 13%. Citigroup and the Japanese banks are little better. HSBC is the world's best capitalised on this measure with 9.2%
So, if we look at HSBC, the potential default in Dubai has knocked 7 or so percent of its value, and other banks have suffered equally. This means that banks that are going to try and float shares to make up their holes in the balance sheet, like the beleaguered nationalised LTSB, are going to face severe issues.
It makes no sense why debts that were bad on a bank's balance sheet would suddenly be Okay, because they moved into the government's pocket. Because the pockets may just not be big enough.
Enjoy the show, you've paid a lot for the ticket.
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