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Dubai builds, but they don’t come


DUBAI/There is something surreal about the financial crisis that has engulfed Dubai.

A small desert emirate, without significant hydrocarbon reserves, Dubai finds itself geared to the eyebrows in the midst of a global downturn. Deutsche Bank estimates its external debts at about $74.3 billion. That, for the record, is 107 percent of the emirate’s expected 2009 GDP, or more than 14 times its government revenues for 2006 (the latest year for which data is available).

But it isn’t just the extreme leverage that is surreal. Dubai has long borrowed heavily to invest. The real twist comes from the wacky way that Dubai has chosen to invest its borrowed cash.

True, not all of Dubai’s money-making schemes were foolish. The development of DP World, a ports services business, made eminent sense, given the emirate’s status as a trade hub. And this has proved reasonably successful.

But some of its “get rich quick” ideas were about as sound as something out of Gulliver’s Travels — the attempts of the state of Lagado to extract sunbeams from cucumbers, for instance. Into this category one might put the attempt to conjure a financial centre out of the desert, or to build luxury housing on sandbanks in the Arabian Gulf. Or, indeed, the attempt to create a sovereign wealth fund, Istithmar, without having any surpluses to inject into it in the first place.

Santander’s debt buy-back not necessarily a flop

Santander’s attempt to buy back 16.5 billion euros of asset-backed debt looks, at first glance like a bit of a flop: in the end investors only sold about 600 million euros of bonds by face value to the bank.

However, the result is not that surprising, for several reasons.

First, 16.5 billion euros was always a long shot. We don’t really know how much of the debt Santander had previously acquired in one-off trades in the secondary market, making it hard to say how much it could have bought back this time.

Russia says “Da” to asset-backed debt

It’s interesting to see Russia proposing a new law to encourage a domestic securitisation market for consumer debt. Russia is still a novice when it comes to asset-backed debt but seems to have cottoned on to something that not all western regulators have fully grasped — securitisation may have helped get us into the current crisis, but we are also going to need it to get us out of it.

US and European banks simply don’t have enough capital to finance both the loans they kept on their balance sheet and those coming due that were previously funded in by the shadow-banking system. They need to find ways to raise new capital and transfer risk to capital market investors. In short, they need securitisation.