The Irish Independent reports that flooding chaos spread from west to east last night after heavy rainfall brought water on the River Liffey to dangerously high levels.
The ESB and Kildare County Council warned residents along the course of the river to be on standby as water had to be released from a dam at Leixlip.
And flood water levels in the Shannon basin in counties Galway and Offaly remained a serious concern.
The flooding has caused chaos in the West, Midlands, South East and now the East, with hundreds forced out of their homes in the past week.
But the Government insisted last night there was no reason to declare a national emergency.
Department of Environment spokesman Sean Dunne said:"There's no scenario where you are suddenly going to say that we are now in a national emergency because of flooding unless the whole country was flooded. The information that's coming through is that some of these areas are already in recovery. This problem is going away."
As the bad weather hit the East yesterday, estimates suggested the final bill for damage across the country could top €1bn.
Major disruption is expected for those living on the commuter belt trying to get to work this morning.
Parts of north Kildare and the outskirts of Dublin, particularly Lucan, were affected.
The River Liffey burst its banks at the Strawberry Beds in Lucan, and the Lower Road was impassable yesterday and last night.
AA Roadwatch warned of several road closures in and around Dublin city as a general flood alert was issued.
Some 95 soldiers are still on flood-related operations in Cork and Athlone, with another 150 on standby.
The ESB has said there will be no increase in the volume of water being released from Parteen Weir into the River Shannon as water levels have dropped 3cm in Lough Derg.
However, there is little consolation for Co Clare residents who are braced for high tides.
Alert
The Midlands and the West are still on high alert. Yesterday -- without warning -- the River Shannon broke across fields and streamed into areas south of Athlone and into Clonfert and Meelick in east Galway, threatening homes and all other properties in its path.
Homeowners in Athlone are still recovering from last week's floods but they were hit again and it is now expected that up to 600 residents in the town and its environs are suffering.
Yesterday, up to 250 people were evacuated from an apartment block in Sallins, Co Kildare.
Families and residents in 100 homes at the Waterways had to be rescued by boat.
And the most vulnerable were hit when 34 elderly residents at Hazel Hall nursing home had to be evacuated in Clane, Co Kildare. Other areas at risk included Ballymore Eustace, Kilcullen, Newbridge, Celbridge, Leixlip and parts of Co Dublin.
An ESB spokesman said large volumes of water were also entering the catchment area from tributaries that drain on to the Liffey.
However, forecasters said last night that there would be a let-up in rainfall in Dublin in the next three days.
The ESB operates three dams on the River Liffey -- at the Poulaphouca Reservoir, Co Wicklow; at Golden Falls, which is 2km downstream; and at Leixlip. A spokesman said while it was not discharging water from Golden Falls dam, at Ballymore Eustace, it would continue to discharge water from Leixlip overnight.
"The rain has stopped and there is none forecast for the morning so we will look at the situation again in the morning,"he added.
Meanwhile, Irish MEP Marian Harkin said the country could claim €50m collectively through the EU solidarity fund.
She said once the damage was assessed, the country could seek aid from the fund.
"For Ireland to be able to claim any funding, damage has to be in the region of€1bn . . . I would say that damage would be in that order,"she said.
The Irish Independent also reports that the aviation regulator is poised to issue a final determination later this week regarding the setting of airport charges in Ireland for the next five years.
Whatever the decision, it is almost certain to be highly contentious. It is unlikely that Commissioner Cathal Guiomard will rubberstamp the massive hike sought by the Dublin Airport Authority (DAA), but even a modest rise will draw outrage from the airport's biggest customers, Ryanair and Aer Lingus.
It is thought that the Commission for Aviation Regulation is working flat out in efforts to deliver the determination later this week. Earlier this year, Mr Guiomard issued a draft determination that the airport passenger fee would rise 13pc to €8.35 from €7.39. The DAA has been looking for a 30pc jump. However, while it is not certain, it is likely the final determination will probably not vary widely from that delivered in the earlier draft.
The aviation regulator has a mandate to take the interests of both the airport operator, and its users including airlines and passengers, into account when determining charges. The DAA wants a big rise in order to cover the costs of its €1.3bn capital expenditure programme at the airport, which includes the cost of the new terminal, T2.
A Ryanair spokeswoman confirmed yesterday that the airline, headed by Michael O'Leary, would this week seek leave for a judicial review of a direction issued last by Transport Minister Noel Dempsey to Mr Guiomard. That ministerial direction told the aviation regulator to ensure the DAA's "financial viability is protected in order to implement government policy", effectively instructing him to raise charges to a level that will satisfy the DAA's financial requirements. The Ryanair spokeswoman said legal documents would be filed "in the next couple of days".
While the airlines and the DAA can seek a review of whatever decision is made this week by the regulator, Ryanair has already threatened to slash capacity and routes further at Dublin Airport if charges continue to rise.
Last week, Ryanair, Aer Lingus and Cityjet claimed that results of a survey commissioned by them into the effects of the Government's €10 travel tax showed the levy had resulted in 3,000 jobs being lost.
The Irish Times reports that final details of the budget are due to be worked out at a meeting of the Cabinet tomorrow morning, where the issue of a further contribution to the public finances by those earning more than €150,000 is likely to be addressed.
Minister for Finance Brian Lenihan has pledged no new taxes will be introduced and Government sources last night categorically ruled out a third rate of income tax. However, to avoid the perception of unfairness, an extra imposition of another kind on single-income earners above €150,000 is under serious consideration.
This would be favoured by Green Party Ministers John Gormley and Eamon Ryan and some of their Fianna Fáil colleagues. The precise form of such an imposition is not agreed but it is thought to be an increase in the income levy rate of 1 or 2 per cent for that category.
Senior Fianna Fáil sources said that, in order to avoid charges of unfairness towards lower-income groups, “the Government has to show that those on high incomes will be asked to give a bit more”.
There were conflicting reports as to whether Green Party Ministers had initially sought a third tax rate for higher earners, without success. Fianna Fáil sources said they had done so but this was strongly denied by sources in the Greens.
Other political sources said a third rate of personal income tax for higher earners would act as a disincentive to international companies considering the establishment or enhancement of an Irish subsidiary.
The December 9th budget will feature significant cuts in social welfare payments, with child benefit a particular target. An across-the-board cut in the rates is inevitable but there is likely to be provision for those on social welfare or low wages to secure a compensatory “top-up” payment.
The jobseekers’ allowance for those under a specific age – either 23 or 25 years – is also expected to be cut, unless the recipient enrols in a course of training or retraining.
Another item of high expenditure that may be cut is the rent supplement scheme, which provides a subsidy for unemployed people living in rented accommodation. This was “costing a fortune”, said one well-placed observer.
Asked if the State pension would be cut, Government sources said there was“no final decision on that”.
Proposals for restricting the rate of tax relief on pension contributions to 30 per cent, and removal of the ceiling for pay-related social insurance (PRSI), are also said to be “on the table”.
The urgency of agreeing the budget terms tomorrow derives from the fact that Mr Lenihan will “need seven to 10 days to put the finishing touches,” sources said.
A Green Party spokesman said:“We are involved in Cabinet discussions to frame a budget which will meet the economic challenges. The Green Party is determined to protect the most vulnerable sectors of society. In all our discussions over 2½ years in Government we have never engaged in any kind of threats.”
Labour’s spokeswoman on social and family affairs, Róisín Shortall, is tabling a Private Members’ motion in the Dáil tomorrow evening against child benefit cuts.
“Families with young children have taken a hammering in the last two budgets and they simply cannot afford any further cuts in the family income,”she said.
The Irish Times also reports that the recession was just a nasty, one-year blip and we can go back to normal. Well, not quite, writes economist Pat McArdle
Global activity is expected to resume strongly in 2010, according to the inaugural edition of the Global Economic Outlook published by international business group The Conference Board.
Projections by the board, whose chief economist Bart van Ark visited Dublin last month, suggest that from 2011 to 2016 global economic growth may even accelerate to 4.2 per cent, little different from the 4.3 per cent average between 2000 and 2008.
So that’s it then; the recession was just a nasty, one-year blip and we can now go back to normal. Not quite.
The contrast between the new and the old worlds could not be more stark. In 2009, the advanced economies, led by the EU-15 and Japan, will contract by 3.3 per cent, whereas the emerging market and developing economies will expand by 2.9 per cent. As their economic weights are roughly equal, one offsets the other, giving zero world growth this year. The recession, bad and all as it was, did not even manage to produce a minus figure at the global level.
However, the dynamics are changing rapidly. The advanced economies’ share of world GDP has fallen from two-thirds in 2000 to 48 per cent today, and is headed for one-third by 2016. It is the latter that should concern us.
Amazingly, for people in Ireland who are mired in recession, Van Ark sees global output per head returning to pre-crisis levels as early as 2010, when the world economy will expand by 3.5 per cent. However, little of this comes from the advanced economies.
They are slated to grow by 1.5 per cent, a decent positive rate, but one that is well below what we are used to.
The recession has done damage, and this shows up in the projected growth rate for 2011 to 2016, which remains at a lowly 1.5 per cent. By comparison, the advanced economies expanded at a 2.1 per cent clip between 2000 and 2008.
The US will no longer be the engine of growth; it will struggle to average 2 per cent a year from now on. Consumer spending is likely to be the weak point once the recovery effects, such as depleting inventories and fiscal and monetary stimuli wane.
While unemployment in Europe and Japan has not increased as dramatically as in the US, the pain may be spread over a longer period. Both regions are likely to experience slower recovery than the US as they “face many remaining structural problems”.
While exports may provide some relief, the high value of the euro and the yen relative to the dollar remain a constraint.
In fact, Van Ark’s forecast for EU-15 growth in 2010 is only 0.6 per cent, well below the consensus 1 per cent or more, and lower even than the recent EU Commission’s 0.7 per cent. All eyes will be on the European Central Bank, which this week unveils its updated forecasts for the euro zone. They are likely to disappoint the markets.
Incidentally, the Conference Board’s forecast for EU-15 medium term growth is only 1 per cent, roughly half its historic average. Only Japan fares worse; its growth is likely to average a miserable 0.5 per cent between 2011 and 2016.
In both cases, the projected GDP growth rates are below potential, which has been revised down to 1.6 per cent in Europe and 1.4 per cent in Japan. Though closer, growth in the US also remains below potential over the forecast period; not a pretty picture. Inflation in the old world at least is not likely to be a problem.
So wherein lies the future?
China provides only part of the answer. It has had its own Tiger, or should that be Panda, experience, recording an astonishing 11.5 per cent average growth in 2000-2008.
This was driven by consumer spending which gradually rose to high double digits, massive increases in bank lending to state-owned companies, and large government subsidies for car and home appliance purchases.
So far it has avoided a credit crisis, but Van Ark is clearly nervous.
China is likely to remain a global force, accounting for almost 30 per cent of future world expansion, but its GDP rates are projected to slow to 7.5 per cent.
However, even at this reduced rate, its contribution to the global growth rate will be four times that of the US and 12 times that of EU-15.
The message is: go east young man; or at the very least, make Mandarin compulsory in the school curriculum.
After China come India and the rest of developing Asia; together, they account for another quarter of world growth.
And the prospects for Ireland? Well, we are an exporting country and expect to export our way out of recession. Problem is, only about 10 per cent of our exports go to the emerging market and developing economies, which are forecast to experience growth of almost 6 per cent per annum over the next seven years.
The rest go to the advanced economies, which are projected to expand by 1.5 per cent.
The Irish Examiner reports that Charlie McCreevy will get a golden handshake package worth more than €1.2 million when his term as Ireland’s representative on the European Commission ends in the new year.
Mr McCreevy will get an EU Commissioner pension of €51,068 per year on top of his ministerial pension of €70,710 and pension as a Kildare North TD of €52,213. This will bring his total annual pension to over €173,000.
The outgoing Commissioner for Internal Markets is entitled to a step-down payment of €537,000 over the next three years to help him adjust to losing his generous salary.
He will also get a lump sum of just under €20,000 on leaving office in January as a "resettlement allowance" to help his move from Brussels back to Ireland.
Mr McCreevy will not have to pay tax on these payments in Ireland, but will have to pay a "community tax" which is paid directly back into the EU’s budget.
During his five-year term in Brussels, Mr McCreevy earned more than €1.4 million including an annual salary of €238,919 as well as a €35,837 "residence allowance" for staying in Brussels and a €7,248 annual entertainment allowance. During this time, he continued to earn his €71,000 annual ministerial pension, which was not reduced when ministers took a pay cut earlier this year.
While his step-down payments will be made straight away, Mr McCreevy’s commissioner pension will not be made available until he turns 65 in five years’ time. It will be worth €853,000 over 16 years. Incoming commissioner, former justice minister Máire Geoghegan Quinn will earn a similar salary and will be entitled to continue claiming her €60,811 ministerial pension and €44,310 TD pension.
Mr McCreevy’s term officially ended in October. But, because of delays in ratifying the Lisbon Treaty, he and his colleagues are staying on in a "caretaking" roll until the new team is put in place. That will not happen until after January when the new commissioners will have to answer questions of the European Parliament, which has to approve the entire commission before it is officially put in place.
The Financial Times reports that the frosty relationship between business and banks over credit is at last showing tentative signs of a thaw.
Business leaders warn, however, that insolvencies could rise sharply in the next 12 months unless sufficient finance is available, especially for smaller companies, while banks say companies must overcome their reluctance to borrow.
The EEF manufacturers’ organisation reports on Monday an easing of credit conditions for the first time in more than a year. In a survey of 410 manufacturers, 33 per cent said the cost of finance had increased in the past two months – down from 47 per cent in the third quarter. Just one in five reported a decline in availability of new borrowing, down from one in three.
“If this continues, it will help allay fears that credit constraints would derail companies’ ability to take advantage of the recovery,”said Lee Hopley, EEF head of economic policy.
“That said, the government and the Bank of England will need to move carefully. Even as we start to see clearer signs of an upturn, companies, especially [small and medium-sized enterprises], will remain vulnerable to higher costs or reductions in the availability of credit.”
Need to wrap up orders
Annika Bosanquet has been struggling since the summer to raise finance to fulfil orders worth more than £200,000, writes Jonathan Guthrie.
The founder of upmarket packaging company Wrapology, which has clients such as Harrods and Armani, first approached HSBC for a letter of credit this summer but she was turned down. The bank also declined to support a loan via the government’s Enterprise Finance Guarantee scheme.
“HSBC said that the scheme was thrust on them the day that the government announced it to the press and that they had no system for processing applications,”Ms Bosanquet says. The bank also tried to halve Wrapology’s overdraft to £50,000, she says.
The former anthropologist, who runs Wrapology with her brother Tom, did not fare any better with Barclays, which refused her request for a letter of credit and said tit could not extend any finance under the EFG because the scheme was “for refinancing, not working capital”.
Ms Bosanquet, who is a board member of Enterprise Insight, a government-sponsored body that promotes entrepreneurship, says: ““It is very depressing because we are not looking for borrowing funded on the never-never – we have confirmed orders.” The company needs to pay for packaging orders made overseas before it can collect payments from its own customers, which include John Lewis, the department store, and Monsoon, the fashion retailer.
HSBC says it has kept Wrapology’s overdraft at £100,000 and denies threatening to reduce it, “even though she has gone well over her overdraft limit”.
Barclays says it aims to lend “appropriately” and that it would be “irresponsible” to put up sums that clients might find hard to repay.
Ms Bosanquet set up Wrapology in 2001. Last year it had a turnover of £1.4m and according to the entrepreneur will make a profit this year.
She says: “There is no point the government fretting over macroeconomic policy if it cannot get money into the system.”
Banks insist they are willing to lend to viable businesses and the problem is lack of demand – companies repaying loans rather than increasing leverage. But previous recessions show that the greatest danger is when trading conditions pick up and shortages of working capital become critical.
Royal Bank of Scotland on Monday becomes the latest lender to publish a charter for SMEs. It extends for a second year its pledge to fix overdraft rates for 12 months on renewal, promises to cap arrangement fees at 1.5 per cent a year for businesses with turnover up to £25m, and extends an offer of two years’ free banking for start-ups from NatWest to RBS customers.
“We have got the building blocks in place to support businesses as they come out of recession. But until the demand builds up for business to invest, the numbers will stay fairly subdued,” said Peter Ibbetson, chairman of small business banking at RBS.
However, Richard Lambert, director-general of the CBI employers’ group, said: “The worry is that as the economy stabilises and companies need to build up their working capital, which they have run down dramatically, the financial constraints will become more acute.”
In some cases, he said,“banks are behaving unwisely. You hear anecdotes of longstanding relationships being forgotten and people being treated in ways they won’t forget when things get better.”
Company liquidations have so far been lower than in the 1990s recession, partly because HM Revenue & Customs has allowed 150,000 businesses to defer more than £4bn of business taxes.
Groups say there is still a problem of loans being refused or terms being so onerous it puts them off from investing. In a survey of 400 companies two weeks ago by the British Chambers of Commerce, 33 per cent said accessing finance had become more difficult, up from 20 per cent in June.
David Frost, the group’s director-general , said he had “never seen an issue as polarised” as that between companies and banks. Medium-sized companies had particular difficulty in getting loans of £1m-£5m, he said. “These are the companies that we are going to rely on to haul the country out of recession.”
Net bank lending to companies has fallen precipitously from its peak in early 2008, partly because foreign banks, which used to account for 40 per cent of business lending, have left the market. Lending in September was 6 per cent down on a year ago, according to the Bank of England. The recent fall, however, is explained by big companies raising capital and paying off bank debt: more than £25bn in net new equity has been issued this year.
SMEs have the biggest problem accessing finance but there are signs of hope. The Bank says lending to SMEs has been growing modestly. According to the British Bankers’ Association, lending to small companies was 4 per cent higher in September than a year ago.
But borrowing can be expensive. According to the Bank, small companies paid an average of 3.5 percentage points above base rate in August, up from 2.5 points in late 2008, while for some the spread was as high as 5.6 points.
Banks say the increase reflects their higher cost of funds and increased risk, and is in line with a 2.5-3.5 per cent historical average.
State-backed RBS and Lloyds are struggling to meet their government-mandated target of lending an extra £27bn by next March. RBS has lent £45bn to business so far this year but companies paid back a similar amount. Lloyds says it has not given up on its £11bn target: its Lloyds TSB lending to SMEs is up 10-12 per cent on last year and its Bank of Scotland lending, which had stalled, is rising again.
Noel Quinn, head of commercial banking at HSBC, said lending was flat year-on-year but was optimistic demand would increase.
Dan Roberts, head of debt products at Barclays Corporate, said approval rates for credit applications had“remained consistent with their high pre-recession levels”.
The FT also reports that if you are a slow mover, you start early. That will be the European Central Bank’s leitmotif as it presses ahead this week with plans to unwind exceptional measures taken to combat the economic crisis.
The Frankfurt-based ECB will leave its main interest rate unchanged at 1 per cent. However, although anxious to avoid drama, expected policy tweaks will underline its determination to implement a timely “exit strategy” and return gradually to something akin to its pre-crisis way of controlling interest rates and providing liquidity.
In doing so it will put itself at odds with the International Monetary Fund, whose managing director, Dominique Strauss-Kahn, has urged policymakers to err“on the side of caution, as exiting too early is costlier than exiting too late”.
Events in Dubai have re-awoken fears of global instability. But the ECB believes the opposite to the IMF – that acting too late is as dangerous as acting too early, if not more so.
Lorenzo Bini Smaghi, an ECB executive board member, argued earlier this month that“the ‘err on the side of being late’ paradigm is potentially as dangerous as the ‘productivity growth’ paradigm of the late 1990s and the ‘fear of deflation’ paradigm of the early 2000s, which led some advanced economies to implement policy stimuli for too long, sowing the seeds of the subsequent crisis”.
A significant fear is of asset price bubbles emerging in Asian countries, which are ahead of the eurozone and US in the economic cycle. One risk is that the ECB, acting faster than the US Federal Reserve, hits exporters by sending the euro higher.
Hours after Thursday’s ECB meeting, Ben Bernanke, the Fed chairman, will speak in Washington at a hearing on his reappointment – increasing the need for Jean-Claude Trichet, the ECB president, to calibrate his message carefully.
So far Mr Trichet has been cautious about eurozone growth prospects. Continental Europe’s worst recession since the 1930s ended in the third quarter, when eurozone gross domestic product rose 0.4 per cent. But the disruption in Dubai has underlined the fragility of economic confidence globally, and eurozone growth was in any case expected to remain anaemic well into 2010.
The ECB’s exit strategy reflects both a return to more normal conditions in financial markets and worries that some eurozone banks are becoming dependent on emergency liquidity provided since Lehman Brothers collapsed in September 2008. Since then the ECB has been matching in full banks’ demand for liquidity for periods of up to 12 months.
In June, banks borrowed €442bn ($662bn, £401bn) in one-year loans – the largest sum ever injected in a single ECB operation. That has ensured that liquidity will remain abundant in the system until at least mid-2010. As part of what economists dubbed “easing by stealth”, it also drove down overnight market interest rates, which are significantly lower than the main policy rate of 1 per cent.
The ECB will not signal a revolution on Thursday and is in no hurry to bring overnight rates back up to the main policy rate’s level. But Miguel Fernández Ordóñez, the Bank of Spain’s governor, told the Financial Times this month that “if you want to be gradualist, you have to anticipate”.
Mr Trichet is expected to confirm that another auction of unlimited one-year liquidity in late December will be the last. Still to be decided is whether also to charge a higher interest rate than 1 per cent, or index the interest rate to changes in the main policy rate. Doing so might be seen as a monetary policy tightening step, although the ECB would probably deny that was its intention.
The ECB is expected to continue for some time to match in full banks’ demand for liquidity in its regular weekly operations. But the level of demand for one-year liquidity in December will, in turn, influence demand for three and six-month liquidity offered in 2010. Mr Trichet may also say this week how those operations will work in future. One option would be to test financial market reaction to a return to a bidding system for some such operations – which would mark another step back towards the pre-crisis regime.
The New York Times reports that trying to prevent a run on its banks, and financial turmoil that some fear could spread globally, the United Arab Emirates helped calm financial markets Monday with its pledge to lend money to banks operating in Dubai, an action that came amid concerns about excessive borrowing around the world.
The move by the group’s central bank was an attempt to head off the kind of crisis of confidence that froze credit markets last year and brought the global economy to the brink of failure, threatening everyone from hedge fund billionaires to retirees who had their savings in supposedly safe investments.
Central bankers and government officials around the world were watching Monday’s stock markets closely for signs that fears are spreading or are being contained, and the early signs were positive. Asian markets in their first hours were up more than 2 percent on Monday morning.
Last week, investors fled the stocks of banks with outstanding loans to the tiny emirate and its investment arm, Dubai World. Now, analysts will be watching to see whether investors desert other highly indebted companies.
While Dubai is not big enough to set off financial repercussions outside the Middle East, the main fear is that investors could flee risky markets all at once in search of safer havens for their money. As in September 2008, when the failure of Lehman Brothers heightened worries about all financial institutions, they might pull back, regardless of the markets’ strength.
Those fears were allayed only after the United States announced a huge bank bailout and began guaranteeing a variety of borrowing that slowly helped credit markets begin functioning again. That many of these measures remain in place could help contain any problems from Dubai now.
But while the federation is following a similar strategy, albeit on a smaller scale, analysts expressed concern that the promise of added funds to support Dubai banks might not be enough to keep anxiety from jumping to other countries and institutions.
Indeed, an analysis from Goldman Sachs on Sunday said that the failure of federation authorities to provide a blanket guarantee for all of Dubai’s debt showed that governments worldwide were less willing to bail out overextended companies and their investors.
“This episode represents a timely reminder that emergency public funding support should not be taken for granted,” wrote Francesco Garzarelli, an analyst based in London for Goldman.
The extent to which the federation and its wealthiest member-state, Abu Dhabi, which has vast oil reserves, appear to guarantee Dubai’s debts could affect how investors view many other companies previously believed to have the implicit backing of their governments.
“There are plenty of people around in world capitals who are tired of bailouts,”said Simon Johnson, a former chief economist at the International Monetary Fund.
As a result, banks that made big loans to some heavily indebted governments and companies might start to incur more losses. The shares of HSBC and Standard Chartered, which lent heavily to Dubai, have fallen sharply in the last week, and Mr. Johnson said that the cost of insuring against defaults by big Irish banks has surged since the Dubai announcement.
A fear of contagion from Dubai would further destabilize European banks that were only starting to mend.
The Dubai crisis began last week, when the emirate said Dubai World would not be able to make on-time payments for some of its $59 billion in debt. The company invested in lavish real estate projects, including artificial islands in the shape of a palm tree and a globe, and spent heavily to acquire stakes in glittering properties like Barneys in New York and the MGM Mirage in Las Vegas.
Dubai was far from alone in taking on too much debt as companies and countries around the world did the same. Investors have already been alarmed by problems in countries in Eastern Europe, in Ireland and in Greece.
Dubai’s problems are also a reminder of the lasting effects of the global real estate bubble, which remains a danger in the United States, where several big banks are encumbered by souring commercial real estate loans.
There is a concern that governments have responded to the financial crisis by taking on unsustainable levels of debt that they may no longer be able to finance. Even in the United States, public debt is forecast to rise to around 80 percent, from about 40 percent, of gross domestic product, the economist Nouriel Roubini said.
“Dubai could be the beginning of a series of sovereign debt issues or crises,”said Mohamed A. El-Erian, chief executive of Pimco, the giant bond-trading firm. “What Dubai is going to do is make people think more intensely about the lagging implications of last year’s crisis. It’s going to be a wake-up call to the people who thought that the financial crisis was just a flesh wound.”
Many analysts expect federation authorities to release further details as soon as Monday on how they plan to restructure the debt of Dubai and Dubai World to keep markets calm.
Analysts will be watching crucial indicators of stability or alarm. The most apparent will be if money is pulled from other investments to the safe havens. Analysts will be monitoring the amount of interest that investors demand to lend money to emerging market countries. It has already risen sharply since the Dubai crisis erupted on Wednesday.
A major worry, investors say, is that the global debt crisis in private debt could metastasize into a debt crisis for governments that are running mounting deficits to pay for bailouts and stimulus packages — especially in Eastern Europe but also in Britain.
In fact, a warning sign has already started flashing: the cost of insuring debt issued by Greece, a member of the euro bloc, is now as much as insuring Turkey’s debt, an investment that was once considered much riskier.
One consequence of the global financial crisis is that Greece has been forced to take on shorter-term external debt. Debt securities due within a year have risen to $24 billion in the second quarter of 2009, from $14.5 billion at the end of 2007, according to figures from international economists.
Many countries may face tests in the weeks and months to come as they try to roll over their existing debts. These countries will not be able to raise money easily or cheaply. This could put pressure on stronger members of the European Union to bail out weaker members, or at least help them restructure their debts and nurse them back to health.
So strung out was Latvia this year that the country barely recovered from a speculative attack on its currency, the lat, though it is a member of the European Union. As it teetered, economists fretted about a coming “lat bath,” like the Thai “baht bath” devaluation that set off the 1997 Asian crisis.
The International Monetary Fund, World Bank and European Union stepped in to prop up the weakest countries, however, and fears of true sovereign defaults in Europe’s most vulnerable countries receded before last week’s turmoil. These institutions’ guarantees, however, do not extend to state-backed companies.
Hungary, Bulgaria and the Baltic states of Latvia, Lithuania and Estonia carry foreign debt that exceeds 100 percent of their gross domestic products, Ivan Tchakarov, chief economist for Russia and the former Soviet states at Nomura bank, said in a telephone interview from London.
But the problems, if any, are likely to be limited to Europe. The tremors would not immediately spread to the United States, beyond the effects of the strengthening of the dollar, and potentially a weakening of commodity prices as investors bet on a slowdown in emerging markets.
However, in the long run, a global credit crisis set off by Dubai would make the cost of financing the trillions of dollars in American debt much more expensive, Mr. Roubini said. “Even the U.S. — over time — cannot run forever unsustainable fiscal deficit,” he said. “The total financing needs of the U.S. will range in the $1.5 trillion to $1.7 trillion a year for the next decade,” he said. “That is a huge amount of public debt to issue and or roll over.”
The NYT also reports that it was the most subtle of gestures, but looking back, many in Dubai now see it as a sign of their salvation.
At the grand opening of the Dubai Air Show this month, the crown prince of Abu Dhabi, Sheik Muhammad bin Zayed al-Nahyan, placed his hand over the hand of Dubai’s ruler, Sheik Mohammed bin Rashid al-Maktoum. That was widely viewed among people here as a sign that Abu Dhabi, by far the largest and richest member-state of the United Arab Emirates federation, would take care of Dubai.
The question now is whether that means Abu Dhabi will use its wealth to bail out Dubai, the deeply indebted city-state that shook world markets when it announced that its chief investment arm would not be able to pay its debts on time.
Dubai is famous as the brash, secular upstart of the emirates, and Abu Dhabi is known as the religious and conservative big brother. Tensions between the two are legion, but when reporters questioned Sheik Mohammed about tensions last week, he told them to“shut up.”
Nevertheless, the debt crisis of the last few days has fed speculation that Abu Dhabi would impose conditions for any bailout, including a stake in prominent Dubai enterprises like Emirates Airlines. Emirati officials have denied those rumors.
The United Arab Emirates’ central bank issued a statement on Sunday saying that it would stand behind foreign and domestic banks operating in the emirates. It did not mention Dubai World, the investment arm of the Dubai government, which is $59 billion in debt.
Analysts say the statement will not be enough to allay fears that the Dubai government could default on part of its sovereign debt.
Still, as fear from Dubai’s debt crisis circled the globe, an unaccustomed quiet settled here at the center of the storm — and it was more than just the hush of the Id al-Adha holiday.
Expatriate bankers and other professionals here are simmering in anxiety, as the world talks about Dubai like a bad seed of the global economy.
“A lot of people are pretty freaked out,” said one American businessman with long experience in the region, who spoke on condition he not be identified for fear of repercussions. “They’re all watching CNN and going: ‘Is Dubai going to default?’ ”
Many in Dubai have a shockingly different perspective.
“Dubai is a victim of media distortion,” wrote one reader to a Web forum of one of the emirates’ most popular newspapers.“All the Western countries have ganged up on Dubai. Why? Because it has succeeded.”
Another reader wrote, “This is all because of jealousy from the Western world,” adding that“Dubai has been at the forefront of development in the Arab world.”
Many citizens in Dubai on Sunday seemed inclined to dismiss all talk of tension among the emirates, insisting that they are not worried about their country’s future.
“Only a few decades ago, this country was nothing, just a desert,”said Thani al-Falaasi, a 31-year-old Emirati businessman who was shopping with a friend on Sunday night in the Dubai Mall. Referring to Dubai’s leader, Sheik Mohammed, he said: “He built it up. Even if there is a crisis, he can solve it. We have great confidence in him.”
That is not the view from elsewhere in the emirates. Like Dubai’s bankers and bondholders, the government of the United Arab Emirates was surprised by Dubai’s announcement on Wednesday that it would need to freeze repayments on the debt of its chief investment arm, Dubai World.
Abu Dhabi, which has more oil than Dubai and no cash problems, could wipe out Dubai World’s $59 billion in debt easily, analysts say.
But that seems unlikely. Despite the announcement by the emirates’ central bank on Sunday that it would make more money available to local and foreign banks in Dubai, analysts say such imprecise promises — the bank did not say how much, or that it would back all the debt of Dubai or Dubai World — may not be enough to placate investors.
Many have been left wondering, again, if the Emirate’s debts are worse than most of the world suspects. Analysts estimate Dubai’s total debt at around $80 billion, but some here say it could well be closer to $120 billion, or more.
Authorities might have hoped that the timing of the announcement — just before the Emirate (and the broader Middle East) was about to shut down for Id al-Adha — would minimize its damages. Instead, it did the opposite. Some Emiratis were also upset by the handling of the announcement.
Dubai’s rags to riches, and possibly back to rags, tale “has all the elements of a Greek tragedy,” said Jan Randolph, head of sovereign risk at Global Insight, a London research company, with “hubris and pathos” in equal measure.
The operative question is whether Abu Dhabi and the United Arab Emirates federation will rescue Dubai from the consequences of its profligacy.
If it does not, the secondary effects could spread to Greece, Britain and some Baltic states, all heavily indebted nations, or to India and the Philippines, where foreign workers in Dubai send back millions to support family each year, or to any corner of the market for credit that individuals, companies and countries all rely on.
Inside Dubai, the crisis has brought to the fore fears and resentments that the legion of foreign workers who make up 90 percent of Dubai’s population have long held toward the small minority of Emiratis who own the place.
Expatriates here have complained for years that Dubai is too secretive about its debt and finances and that its rapid growth came at the expense of accountability.
“It breeds further distrust,” said John McGaw, a senior adviser to Golden Oryx, a Dubai business development company. “A lot of people have been disappointed with the way they have been treated over the past 12 to 18 months.”
