Dubai Son-of-Subprime Shows Disease Still With Us: Matthew Lynn-브름버그 11/1: 모래위의 성

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Dec. 1 (Bloomberg) -- If it was a movie trailer, we know what the voice-over would say: Just when you thought it was safe to go back into the capital markets, Dubai gives us “Son of Subprime.”

The markets have been thrown into turmoil by the decision of Dubai World, the government investment company with $59 billion of liabilities, to delay repayment on much of its debt. Currencies have wobbled, and bonds taken a battering.

Investors are right to be unnerved.

By itself, Dubai might not matter that much. Its ambitions to mold itself as the mutant offspring of Las Vegas and Geneva always smacked of the kind of hubris that flourishes in a bubble. Even if the company can’t repay its debt, so much red ink is already swilling around the global financial system, it will take a bigger number than that to touch off a real panic.

This does matter: The debt delay reminds us that while the symptoms of the subprime crisis might have been dealt with, the basic disease hasn’t been tackled. Like a cancer, it has been dormant, waiting to strike again.

The nub of the subprime crisis was loading up too much debt onto people or companies that couldn’t afford it. That hasn’t changed. If you look at the way sovereign debt is exploding, at the losses being taken by the private-equity industry, or at the way that credit-card debts are spinning out of control, then it is clear that the basic lesson of not piling too much leverage onto flimsy foundations hasn’t been learned.

Textbook Case

If anyone ever feels like writing a textbook on how not to reschedule debts, then Dubai World will make the perfect example. The company gave very little warning that it was running into trouble. It made an abrupt announcement just as the U.S. markets were shutting down for Thanksgiving. It wasn’t ready to follow up with clear, precise information.

How bad the losses are remains to be seen. After the multiple collapses of the last year, it was hardly surprising the markets expected the worst.

The trouble is, Dubai is far from alone.

Look at the ballooning of public debt. Greece, for example, said it may run a 2009 budget deficit of more than 12 percent of gross domestic product. The country’s credit rating was cut one step to A- by Fitch Ratings last month. So far, it shows no serious intention of bringing that deficit under control. Many others are in a very similar position, including big economies such as the U.K.

Unsustainable Debt

The trouble is, at a certain point, the debt just becomes uncontainable. Sovereign debt, we’re told, is safe because the government can always just raise taxes to make the payments. But if you raise taxes too much, the economy shrinks and tax revenue tumbles. The government has no choice but to default. Debt turns out not to be safe at all.

Next, take a look at the pain in the private-equity industry. The U.S. and U.K. banks are still reluctant to refinance the loans they have advanced to leveraged buyouts, according to the British financier Guy Hands, who runs Terra Firma Capital Partners Ltd.

Everyone knows that too much debt was loaded onto companies at the height of the credit bubble. But they are still reluctant to own up to the problem, as if sticking their heads in the sand will make it go away.

Lastly, how about credit-card debt? According to Moody’s Investors Service the charge-off index for British credit-card companies was 11.8 percent in September, almost double what it was in the first quarter of last year.

One in 10

In effect, one pound in every 10 owed on British credit cards right now isn’t going to be paid back. Nor is the picture much better in most other developed countries, the U.S. in particular. It is hard to imagine how anyone really thinks that situation is sustainable.

Huge swathes of the population are living wildly beyond their means, spending money that appears magically from thin air. If you don’t think that is going to blow up one day, then you need to lie down in a dark room until you’ve figured out how to think straight again.

The problem is always the same -- just as it was for the mortgages that were the root of the original subprime crisis. Too much debt is being loaded onto a flimsy base. Eventually the whole edifice comes crashing down. Dubai has given us a preview of the trouble ahead. The main performance is still to come.

Be Realistic

There are three lessons the financial system must learn from the Dubai crisis.

It needs to start being realistic about the genuine earnings prospects of countries, companies and individuals. There is no point in pretending a state, a company or a person can earn more than they really can.

It needs to restructure loans that have little prospect of being repaid in full, rather than pretend that the economy will ride to the rescue.

And, most importantly, it needs to stop piling up fresh debt onto countries or people that can’t afford to pay it back.

Dubai was built quite literally on sand. Plenty of other countries and companies were built on the metaphorical kind, and those foundations aren’t likely to prove any more solid.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

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To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net

Last Updated: November 30, 2009 19:00 EST

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