First with Financial Comment from Arabia

$1bn Damas debt standstill latest Dubai deleveraging saga

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The largest GCC jewelry company Damas is about to sign a $1 billion debt standstill agreement with its creditors, according to The National today. This is just the latest story in a debt deleveraging saga that will be a drag on regional growth for some years to come.

Consultants at McKinsey have been examining how long it takes to absorb the impact of a financial crisis and its conclusions are disheartening.

Debt recovery timetable

If a country avoids default, war and high inflation then the average time to recover is six to seven years, by which time its debt to GDP ratio falls to 25 per cent. Even worse, the study found that it normally takes two years post-crisis for austerity to actually hit, and that then lasts for two to three years.

Governments around the world have chosen to offset the deleveraging impact of the global financial crisis with huge government borrowing programs. But loading up on debt could just be postponing the day of reckoning. Indeed, that is probably why the McKinsey study shows austerity taking so long to hit the real economy after a financial crisis.

In the context of the Gulf States then governments have also been largely following this pattern. The Saudi government cash injections into its economy last year were among the largest in the world, and Abu Dhabi has so far loaned Dubai $25 billion to ease its debt problems.

Foreign exchange reserves

But the Gulf States at least have had the foreign exchange reserves from the oil boom years to sustain them through the Great Recession. The US and UK have resorted to printing money to fund their deficits.

Standby for the inevitable inflation that will follow the rolling of the printing presses, albeit with a time lag to catch investors and depositors unaware. Wars look less likely, except for minor ones. Defaults could be a possibility if the global economy really deteriorates again, and today’s recovery becomes tomorrow’s double-dip recession.

But what the McKinsey report summarizes is only commonsense. It took years for the global economy to accumulate its massive debts and it is going to take years to pay them off, one way or another.


Written by Peter Cooper

January 17, 2010 at 10:40 am

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