We examine two very hot and timely themes in this blog: Global Warming and the Dubai Meltdown

The Empire Strikes Back

“Hotel guests should have their electricity monitored; hefty aviation taxes should be introduced to deter people from flying; and iced water in restaurants should be curtailed”

Rajendra Pachauri, Railroad Engineer and chair of the Intergovernmental Panel on Climate Change (IPCC)

Dr Pachauri’s admonitions coming shortly before the commencement of the Global climate change conference did not deter the cricket aficionado from flying from New York to Delhi in order to participate in a one day match and then flying back again. In fact, until a few weeks ago the die seemed cast: the IPCC and the climate change proponents and their assorted hangers on seemed on the verge of a major breakthrough in securing global cooperation for limiting CO2 emissions, a massive wealth transfer to developing countries from the developed world, and approval of a cap and trade system for the carbon credits. They had “won”.

 Not even the disclosure that a large chunk of the key research underpinning recent policies had been seriously compromised and that scientists not in agreement with the Anthropogenic Global Warming theory were routinely prevented from conducting appropriate due diligence on AGW research papers and contributing their own research and input to the peer review process seemed to make any difference to the IPCC and its supporters. The icing on the cake seemed to be President Obama’s recent commitment to GHG reductions and yesterday’s announcement by the Environmental Protection Agency of the US that CO2 (i.e. plant food) is henceforth to be considered a pollutant and within its regulatory ambit.

 This hubris was reflected in an editorial run by 56 newspapers in 45 countries (note: there are over 5000 regularly issued major news publications and over 190 countries on the face of the planet) on the eve of the Copenhagen summit. One such paper which counts itself in the cheering section, early this morning proclaimed that “Hope for Emissions Deal Surges in Copenhagen”.

 Unfortunately for the believers, a short time later the UK Guardian newspaper reported that “the  UN Copenhagen climate talks are in disarray today after developing countries reacted furiously to leaked documents that show world leaders will next week be asked to sign an agreement that hands more power to rich countries, abandons the Kyoto protocol and sidelines the UN’s role in all future climate change negotiations.”

 For now it looks to us as though a much needed “Time-Out” in the climate debate is in the offing at “Carbon-hagen”, at a minimum this will reduce the GHG emissions associated with the hot air surrounding this issue.

Castles in the Sand

 “When things go sour, you can’t have some banks in the West going to Dubai and saying ‘oops’ and crying wolf and saying, ‘You should have guaranteed those loans.’”

 Saudi Prince Alwaleed bin Talal

 In the mid-1990’s the Abu Dhabi government had drawn up similarly grandiose plans for a development called the Saadiyat Free Trade Zone (FTZ) and was actively courting investors for the development. Following a few due diligence visits, I and a few others on our investment banking team had developed misgivings about our firm’s potential involvement with the proposed transaction. Then, back in London and after some rather intense internal debates, our Chairman, a venerable British peer and former Permanent Secretary of the UK Treasury, shot down the deal in a Credit Review meeting with the words “Mr R. you are describing a 19^th century concept – we are about to enter the 21^st. Are you utterly, barking mad !!?”

 Luckily for us that was it. Sir D had nailed it.

 Also, and fortunately for them, and their eventual investors, the Abu Dhabi leadership had independantly, and wisely, scaled back the early development plans before the FTZ project was launched some years later and with delivery dates into 2014.

 It is now obvious to everyone that the Dubai project could not sustain its own footprint and fell apart from the weight of financial obligations that could not be met by recurring revenues. Luxury hotel rooms for example, are changing hands at $100 per night or less. This does not make sense when engineering, construction, and maintenance costs are significantly higher than in New York or London. There are numerous other examples of misallocated investment dollars in this tale.

 Hence the fallout. The “foreigner blogs” in Dubai have been buzzing recently with hard luck stories of expats being thrown out of work and unable to pay back $100,000 ++ “rental loans” from local banks (which had on their earlier arrival been  quickly supplemented with further credits enabling the expats to buy cars and other goodies in order to make life more comfortable in C 38 degree heat), that there are daily queues of bank customers lining up to withdraw funds, and that literally hundreds of building sites have been abandoned because the expat engineering and construction companies (some of which hadn’t been paid in many months) have picked up sticks and moved on.

 The Saadiyat FTZ development appears to be still proceeding but its viability has been thrown into question by a number of issues, including the simple fact that many of the banks heavily involved with Dubai are also lending money to the Abu Dhabi project and other regional schemes. They include Standard Chartered, ADCB Bank, Mashreq and others. Contrary to early media reports, it is fairly easy to imagine that this contagion could affect the entire area and beyond….and…Oh….did we mention that the Dubai World meltdown would be the first “acid test” of Islamic finance-based claims placed under the duress of a bankruptcy? This could be a real roller coaster…….

 Apart from the Islamic finance angle, a close analog to this snafu is the Development Finance Corporation of New Zealand debacle which played out between late 1988 and 1991. In that situation, similar claims of sub rosa state guarantees were made by disgruntled investors, following which, in 1989, a coalition of banks almost brought the country to its knees by boycotting a crucial rollover financing operation in retribution for the government’s refusal to acknowledge what the banks considered were its implied obligations. Eventually the Crown was forced to compromise its early negotiating position and give in, in some important ways, to the offshore creditors.

 In other similarities to the DFC, the Dubai debacle is far from being resolved; there are basic questions of how large the debt is, the lender security position, the possible workout scenarios and the role of the local government and that of the larger UAE that must find clarification – not to mention the fact that political relationships within the UAE are likely under significant strain.

 ….And of course today’s foreclosure of the New York ‘W” hotel by Dubai World’s creditors and its tumbling bond prices are undoubtedly giving the Dubai leadership some pause.

 Our view is that we are only at the “beginning of the beginning” of this one, particularly, if what now appears to be a containable liquidity crisis deteriorates into a government solvency crisis.

[For art and history buffs, and possibly some banking types, an exhibition entitled “Disorientation II: The Rise and Fall of Arab Cities” was recently unveiled at the Manarat Al Saadiayat for display until 20th February 2010 ]

This entry was posted on Tuesday, December 8th, 2009 at 9:43 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.