The MT diary

On Dubai's slippery slopes; beware Greek bonds; predictions for a preposterous 2010.

by Howard Davies
Last Updated: 31 Aug 2010

I had a very pleasant dinner at the bottom of a ski slope the other day. The restaurant served only salmon, presented in every possible way - from sashimi through smoked to poached with a sauce hollandaise. The skiers gliding by on the other side of the plate-glass windows were a little distracting, but we managed to concentrate on the subject in hand. The severe debt problems of the country we were in proved preoccupying enough to hold one's attention.

A Christmas trip to Iceland to visit Santa? No, I was in Dubai, as it happens, where the Gluhwein flows 12 months of the year. The slope seemed to be doing good business, and my hotel was fairly full, though almost entirely of Russians. But there is an ominous number of construction sites with little observable activity, including dozens of half-built stations on a massive new rapid-transit network due to open next year.

There is plenty of money, of course, in the United Arab Emirates, and not all the wealth of Abu Dhabi has been spent buying bench players for Manchester City. But how much of it will flow to the bondholders of Dubai World and Nakheel is less clear. I hope Michael Owen and David Beckham were paid in cash for their arduous promotional work for The Palm and The World. Well, to be honest (as footballers say ad nauseam), I rather hope they weren't.

Francis Lee, a Man City striker from another era, with a goal-scoring record Owen can only dream about, was in my hotel, looking in good shape. If I were Fabio Capello, I would be thinking seriously about Franny, given that the other choices are Emile Heskey and Peter Crouch.

But I digress. The Dubai announcement has caused a fluttering in the financial dovecotes. Are there other sovereign or quasi-sovereign borrowers who may be in trouble as the consequences of the recession flow through their public accounts? Gillian Tett in the FT - the queen of commentators to Robert Peston's king (what adorable, investigative children they would have together) - has asked rhetorically if sovereign debt is the new subprime. Greek government bond spreads widened even as she processed her finely crafted sentences.

I suspect that the market reaction was overdone, though it is true that the Greeks have serious budget and competitiveness problems, which they so far show little sign of addressing. A eurozone default would have incalculable consequences, and the German finance minister has rather boldly said that it's one for all and all for one. The spirit of d'Artagnan lives on in Berlin. But I imagine there are now teams of lawyers all over the City trying to check the covenants on all those bonds that they thought were government-backed, a la Dubai World, but which, if push comes to shove, may turn out not to be quite so gold-plated.

Back home, things are not much better. Both Government and Opposition still try to maintain that we can solve a £90bn structural deficit by 'cutting waste' and trimming bureaucrats and back-office staff. I fear the voters have a nasty surprise in store, whoever wins.

But in other respects, politics is changing in interesting ways. It's not long since we ridiculed the French for deeming French yoghurt to be a strategic national asset that couldn't be allowed to be bought by the foreigner. Now Peter Mandelson has decided that the same is true of British chocolate, and that Cadbury is held in sacred trust for the Brummies. He has added 'Minister for Fruit & Nut' to his array of titles. Will it work? Doesn't seem very likely, but we shall see.

It does show, however, that many of the political certainties we have lived with for three decades are now in question. 'You can't buck the market?' - well, it seems, maybe you can, and indeed should. 'You can't tax the City or it will get up and leave' - well that's as may be, but 'good riddance' many now cry.

The anxiety in the Square Mile is palpable. Clearly, new arguments are needed to defend the banks. Their corporate affairs departments have begun to peddle the line that large bonuses are paid only so as to allow the individuals concerned to contribute ever more generously to Her Majesty's Revenue & Customs. That one needs a bit more elaboration to be persuasive, but there's more mileage in it than the characterisation of investment banking as 'doing God's work'. A denial was issued from on high, through pulpits across the land. God is not mocked.

In spite of the cheerful stock market, I suspect few in business lamented the passing of 2009. We didn't all die, is about the best that can be said. But what kind of year will this new one be?

A bit of a struggle, I expect. The recovery will be fitful. Political planning blight will not help. Interest rates will remain low, though QE will gradually unwind. Otherwise, there's little good news on the horizon. Taxes will go up, and public spending down. Share prices will go nowhere fast. England will come fourth in the RBS (or should it be HMG?) Six Nations rugby, and go out humiliatingly in the quarter-final of the World Cup. For the 76th successive year, Lancashire will fail to win the County Championship. Even worse, Manchester United will win the Premiership. Again. To be honest, Brian, I don't know how I retain the will to live.

- Howard Davies is the director of the London School of Economics

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