Banks: Cry and Cry Again

The New York Times circa December 2nd has painted a very gloomy post-Dubai fallout. In a sense, this is equivalent to the the second "sub-prime". Just when the banks are ready to go into the waters, another storm starts!

Let us read the article in its entirety.

" As Dubai, that one-time wonderland in the desert, struggles to pay its bills, a troubling question hangs over the financial world: Is this latest financial crisis an isolated event, or a harbinger of still more debt shocks?

Big banks that have only just begun to recover from the financial shocks of last year are now nervously eyeing their potential exposure to highly indebted corporations and governments.

From the Baltics to the Mediterranean, the bills for an unprecedented borrowing binge are starting to fall due. In Russia and the former Soviet bloc, where high oil prices helped fuel blistering growth, a mountain of debt must be refinanced as short-term IOUs come due.

Even in rich nations like the United States and Japan, which are increasing government spending to shore up slack economies, mounting budget deficits are raising concern about governments’ ability to shoulder their debts, especially once interest rates start to rise again.

The numbers are startling. In Germany, government debt outstanding is expected to increase to the equivalent of 77 per cent of the nation’s economic output next year, from 60 per cent in 2002. In Britain, that figure is expected to more than double over the same period, to more than 80 per cent.

The burdens are even greater in Ireland and Latvia, where economic booms fuelled by easy credit and soaring property values have given way to precipitous busts. Public debt in Ireland is expected to soar to 83 per cent of gross domestic product (GDP) next year, from just 25 per cent in 2007. Latvia is sinking into debt even faster. Its borrowings will reach the equivalent of nearly half the economy next year, up from 9 per cent a mere two years ago.

Like Latvia, the Baltic states of Lithuania and Estonia remain worryingly exposed, as do Bulgaria and Hungry. All of these nations carry foreign debt that exceeds 100 per cent of their GDP.

External debt is often held in a foreign currency, which means governments cannot use devaluation of their own currencies as a tool to reduce their debt when they run into trouble, according to economics professor Maurice Obstfeld at the University of California, Berkeley.

Few analysts predict a major nation will default on its government debts in the immediate future. Indeed, many maintain that rich nations and the International Monetary Fund would intervene in the event that a government needs to be bailed out.

But there are no assurances that companies in these nations, which, like governments, gorged on debt in good times, will be rescued.

Dubai’s refusal to guarantee the debts of its investment arm, Dubai World, may set a precedent for other indebted governments to abandon companies that investors had in the past assumed enjoyed full state backing.

“I see very good reasons to be worried that at some point in 2010, we are going to see more cases of ring-fencing because governments realise they can’t afford to guarantee the debts of these companies,” said Pierre Cailleteau, managing director of the global sovereign risk group and chief economist of Moody’s.

Said noted Harvard economist Kenneth Rogoff: “I think right now, every vulnerable country has one or two deep-pocketed backers that pretty much rule out a sudden run.”

But he said he expected a wave of defaults about two years from now, when the countries now serving as implicit guarantors turn their focus to economic problems at home.

One feature of the financial crisis is that some governments have taken on increasingly short- term debt. In the US, for example, Treasury debt maturing within one year has risen from around 33 per cent of total debt two years ago to around 44 per cent this summer, while falling slightly since then, according to Wrightson ICAP.

The US will soon have debt problems of its own.

“In another couple years, as industrialised countries’ own debts — in places like Germany, Japan and the United States — get worse, they will become more reluctant to open up their wallets to spendthrift emerging markets, or at least countries they view that way,” Rogoff said.

This might spell trouble for cash-tight nations. Facing a need to roll over their maturing debts, emerging markets may have to borrow around US$65 billion (RM221 billion) next year alone, said Gary Kleiman of Kleiman International."