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What Europe Could Learn From Dubai On How To Save The Eurozone From Their Bastiat Farce

Interest-Rates / Global Debt Crisis Jul 20, 2011 - 03:26 PM GMT

By: Andrew_Butter


Best Financial Markets Analysis ArticleThere is an article on Martin Wolf’s blog at the FT on “How to Save the Eurozone”, which you can read for free.  It’s by Lawrence Summers; his bio says he was Treasury Secretary under Bill Clinton but says nothing about Andrei Shleifer or how he shafted Brooksley Born and helped Harvard University lose a billion.

Snide comments on the man’s pedigree aside, it’s a very good article; I particularly liked the part about how “US policymakers were applauded for about 12 hours for their willingness to let Lehman go bankrupt”.

And how it is a Big Mistake when dealing with financial meltdowns to get bogged-down in the blame-game or to have unrealistic expectations about how debtors are going to pull themselves up by their bootstraps. And above all, that resolving such a crisis is all about the parties that can legitimately hold back and ring-fence their losses, instead of that, being pragmatic and boldly cutting out the gangrene, even if it hurts, and costs. 

He should know; he had first-hand experience in Mexico, Indonesia, and Russia and he was involved in various aspects of the US Credit Crunch, both before and after. Some say he helped play a part in creating it, although there no real evidence that lack of regulation of derivatives caused that Charlie Foxtrot, credit default swaps did not create securitization, they just gamed it. But either way, who better to catch the bent gamekeeper, than the fox?

If my dad was still alive he would laugh himself to death. He said this was going to happen ten years ago, just like it happened in the UAE in 1980; and then the same thing happened in Dubai just recently.

It’s all about the combination of the Fairy Godmother syndrome blended with Frédéric Bastiat’s idea that “the alleged sophisticate concentrates on "what is seen" and neglects "what is not seen,"” which can create an explosive mix.

The PIIGS borrowed money and the lenders lent money; and never forget, it takes two to dance when the music plays; on the implicit guarantee that if anything went wrong, then Big Brother would step in and magically make it right, somehow. And sure they cheated a bit, what’s the harm? If it’s possible to circumvent the Maastricht Treaty using swaps created by God’s Workers, well why not, after all Fairy Godmother will pay in the end? And then when you get away with it once, well, why not, just a little bit more?

All the while the sophisticates in Brussels were concentrating on what was “seen” and neglecting what was “not seen”. Putting aside the indignation of hard-working Protestant German and French taxpayers having to bail out lazy Catholics, and yes I know there are Catholics there too, but I’m talking taxpayers here, there is some blame to be spread around.

As in “oversight”, what were the bureaucrats in Brussels, the regulators in the ECB, and the accountants auditing Societie Generale etc…THINKING?!!

I tell you what they were thinking, they were thinking that Big Brother Fairy Godmother would make it all right, and that in the meantime there were bonuses and fat EU salaries to be made, by not rocking the boat.

The European debt crisis is European, there are two choices, (a) pull back and let the European Union collapse (b) swallow deep, and deal with it, and let the European Union go forwards. Without wanting to debate the pro’s and con’s of the EU, don’t ever let any man fool you that having a baby is painless.

In 2008 the world woke up to the news that the economic powerhouse Dubai had not actually invented a way to turn desalinated water into gold and was somehow, mysteriously in debt to the tune of $100 billion, which for an economy of $60 billion (before they doctored the numbers), is a lot of debt to rack up in five years.

Everyone thought that Uncle Abu Dhabi would come to the rescue, although prior to the event, no one had actually told them they had got that job. Then they did, sort of, but not without a fight; and they played their cards very well.

What no one had “seen” when they joined the dance to lend money, was that there was a link missing out of the chain that connected the $100billion to (a) the legitimate government of Dubai and (b) to Abu Dhabi as the “senior partner” in the United Arab Emirates. As in much of the debt was securitized by assets in free-zones which are legally outside the jurisdiction of UAE commercial Law.

You won’t hear much about the Dubai Debt Crisis these days, Dubai still works, like normal, the water comes through the pipes, the electricity didn’t get turned off, and the Dubai Municipality still does an excellent job cleaning the streets and collecting the garbage, as if nothing happened. Although “unseen” there is still activity, as the creditors come back, and back, and back again, to negotiate with Uncle Abu Dhabi about how much of a haircut (more like a shave) they can take without squealing.

If the European Union is to survive then the Fairy Godmothers are going to have to stand firm and declare that they are going to sort out the mess. And then they are going to have to start playing hardball, not so much with the debtors but with the creditors.

“Austerity” has a nice ring to it, like cutting out a pound of flesh or breaking legs as a mechanism of imposing financial discipline. But that’s not how grown-up financial systems work, they work on the principle that for the foundation of AAA debt, no matter what you got to do to slice it and dice it to create it, the LTV needs to be less than 70% and the DSCR needs to be greater than 1.2; period. So when the loan sharks who don’t care about such details, pile into the police station, demanding their “legal right” to break legs or else they will short, the best thing to do is to break a few of their legs.

Start off by looking hard at how much of the debt that was piled on by the PIIGS was legitimate.

The bankers who lent and who created the swaps and the other instruments of deception had to know that they were circumventing the Law, as laid down in the Maastricht Treaty. Its one thing for government to protect legitimate bond-holders; it’s something else completely for them to assist loan-sharks in collecting on their out-standings.

The rest of Europe bears a responsibility for what happened; they need to help the PIIGS to dig themselves out of their hole, and austerity is not the way to do that.

Punishing the population in Greece, Italy and Ireland for the fact that their elected government took kick-backs from the rich to allow them to avoid paying tax, is, first of all not fair (the people who are slated to pay the bill (the younger generation) did not vote for that or get a slice of the cake, and second it’s not smart; the only legitimate condition to demand in a crisis, is that there is real change in governance.

And insofar as the creditors are concerned, if the loans were legal, and the borrowers were not circumventing the Maastricht Treaty by taking those loans, well honor them (sort-f…nothing wrong with negotiation as in if you owe a billion you got a problem, if you owe $300 billion the creditors got a problem). If not well, just politely educate the lenders that in civilized society, loan-sharking is not legal.

Like Bob Dylan said, “to live outside the Law, you gotta be honest”.

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2011 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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