The extension sought for debt repayment (“standstill” arrangement) by both Dubai World and Nakheel late last week has caused ripples in the financial markets. To set the record straight, this request is not a default, nor does it amount to a restructuring of debt. Those things appear only after the creditors react. This will take some time.
In the meantime, this has set off speculation on further hidden losses or credit strains, off-balance sheet liabilities in other enterprises in Dubai or in the emirate itself. Estimates of exposure by major foreign banks to Dubai have appeared. Wholesale panic is premature. There are resources available with the United Arab Emirates to satisfy creditors. The question is one of willingness and the terms that would let the cash flow to creditors. Since there is insufficient transparency, it is hard to form judgements on how things would proceed from here. In the absence of information, speculation takes over. That is the status now. However, an objective analysis would lead to the conclusion— based on available information—that the problem should be contained (that famous word).
Amid all the hand-wringing over Dubai, what is being forgotten is that what has happened in Dubai over the last several years is only a manifestation of a global phenomenon. That is the problem of instant gratification. This affliction lies behind the global financial crisis. Psychologists and child experts tell parents that if there is one thing that needs to be taught to our children, it is delayed gratification. Children who are able to delay their gratification turn out to be stable human beings in their adulthood.
Cities cannot be built in half a decade. Cities are not about tall concrete, steel and glass structures. They are breathing, living organisms with culture. Culture is historical. It takes time. Similarly, economic growth has to occur at a sustainable pace. Debt seduces us into thinking that we can have more of it than what is good for us.
Look at the concern over how much Americans spent on the so-called “Black Friday” (what a strange adjective). Normally, one would applaud if Americans, saddled with debt, chose to stay at home over the Thanksgiving weekend and spent time with their families. Instead, the world was hoping they would go out and spend more than they did in 2008. These warped values that brought us into the crisis are expected to lead us out of it. They have not gone away, and that ought to be our concern as we enter into 2010.
Thomas Friedman wrote an excellent piece in The New York Times last Sunday, calling it advice from grandma. His last paragraph is worth reproducing:
“The standard answer is that we need better leaders. The real answer is that we need better citizens. We need citizens who will convey to their leaders that they are ready to sacrifice, even pay, yes, higher taxes, and will not punish politicians who ask them to do the hard things.” (See http://www.nytimes.com/2009/11/22/opinion/22friedman.html)
When we do not have time for grandma, it is unlikely that we will have time for her advice.
Frankly, the need for better citizens is universal. Developing countries now seem impatient to be anointed global leaders without realizing that they need to get several things right, and these take time. They are: democratization of investing, corporate governance and a liberal, open order that spreads the fruits of prosperity among a wide cross-section of society. Warts and all, Western nations clearly did a good job of that in the 20th century and that is why until prosperity recently reintroduced sloth, corruption, complacency and hubris, they were able to enjoy unquestioned economic leadership.
Developing countries might taste relative economic success but sustaining it and translating it into higher return on investment implies a liberal, open society based on governance and diffusion of prosperity instead of it being cornered by oligarchic interests. That job is not done yet.
If the hubris about breaking speed limits to growth and the achievement of permanent great moderation in economic cycles has brought the severest test yet of the US’ global supremacy, the prevalence of the same mindset in the developing world does not augur well for the great decoupling that some have taken for granted and some await with bated breath.
Hence, to be generous to today’s wannabe leaders in the developing world, the 21st century might ultimately be viewed as the period of transition for the hitherto poor nations but, on current evidence, it may not be the century of their arrival.
All this might be good for op-eds. But investors would be questioning its relevance for their actions. The answer is the same. Mind the risk and mind the price one pays for assets, and those are the equivalent of accepting delayed gratification in life.
On behalf of all of us, praying for a year of learning to accept delayed gratification.
Talk to you again on 12 January.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at firstname.lastname@example.org