Strategies and Cheese

After last week’s standstill — note to self: try to write at least one post per week. So here are 3 interesting topics that caught my attention last week. Hmm, that actually ain’t a bad idea — if nothing special comes up, I will try to write a weekly update on something plus “The BG Story”. The BG Story will come as an additional bonus for all my fellow Bulgarian friends that have started following my blog. Alright, here goes.

Dubai: will we see a double-dip fincancial crisis due to Dubai’s debt issues?

A valid question I suppose raised by many immediately after last week’s debt moratorium on Dubai World’s debt in regard to its subsidiary Nakheel. Nakheel is Dubai government’s real estate development vehicle that bravely invested in outrageously lavish projects such as the Palm Islands (a showcase of unnecessary land reclamation) and the Nakheel Tower — the would-be world’s tallest skyscraper, whose construction was already put on hold in January this year.

All in all, the proposed extension of maturity of the US-$ 59 billion worth of debt until May 2010 triggered luckily no massive, Lehman-II-style global sell off. I’d venture to guess a couple of reasons for that:

• First and foremost, everyone should have been aware by now that Dubai’s construction boom and property bubble have come to a halt and a much needed reality check was due. The imminent correction due — decline of buyers and inevitable tightening of cashflow — is anything but a surprise for anyone invested in those real estate projects.
• $59 billion is peanuts compared to the thousands of billions of real estate debt that the collective American household had accumulated for many years before the credit crunch eventually struck
• The banks and Sovereign Wealth Funds of the Emirates should have enough cash on their hands (some sources quote a total for Saudi Arabia and Abu Dhabi of US-$ 1200 billion) to provide support for Dubai’s debt
• Although Dubai’s government initial reaction was somewhat surprising, I think they did the right thing by not announcing that Nakheel’s debt will be underwritten right away. Why? Because, although later on Abu Dhabi’s central bank confirmed it would step up to help, they are setting a good example for prudent behavior to prevent future build up of bail-out candidates.

After reading a couple of articles I understand why analysts seem to conclude that Dubai’s debt issues will continue to cast a grim shadow on global markets until the end of the year and maybe beyond. However, in the end of the day I don’t think that will trigger anything Lehman-like.

Der Standard: Eastern Europe to see the slowest economic growth

Not surprisingly the press in Austria follows eagerly anything CEE/SEE related. In the past two weeks two alarming articles came up in Der Standard. EBRD’s chief economist Erik Berglöf estimated that the region will underperform significantly compared to the rest of the world in terms of economic growth.

In yet another Der Standard article Roland Berger’s CEE expert Vladimir Preveden holds that Eastern Europe will lose popularity as an economic destination. Some countries such as Poland, the Czech Republic, Slovenia and Slovakia  are likely to develop very differently “post-crisis” than region peers such as Hungary, Bulgaria or Romania. Structural reforms in those countries can only be brought about by either continious pressure from Brussels or by the IMF. Latvia’s standby agreement comes to mind.

In sum those countires are now at a sustainable strategic disadvantage. As Preveden points out, they also have very serious issues to deal with — accelerated ageing of the population together with steady brain drain and westward immigration.

The different, i.e. lower industrial profile of those countries renders them very dependent on foreign investments. Now, even though these are all risks that foreign investors were even pre-crisis well aware of, their “worst-case” scenario has certainly happened. The imbalances that were built after years of unsustainable growth, overinvestment in dubious short-term projects and relative underinvestment in local industrial development will continue to put pressure and dampen growth even after Western Europe recovers and beyond. Contrary to some SEE analyses that I read earlier this year, the common opinion now seems to be that SEE will not lead, but lag in terms of rebound growth.

The BG Story: FIBank downgraded by Moody’s, stops cooperation with them

Here’s an interesting official blog post in Capital.bg. FIBank’s response to being downgraded by Moody’s struck me as very “typical”, although breaking up with the agency might make good sense in their situation on cost grounds alone. I strongly agree with the way the blog article was written and I was not surprised at all by the way FIBank’s Marketing/PR director responded in the comments below. All in all, I consider this a clear case of poorly handled PR job by FIBank. There is no point in discussing the rating downgrade itself; it was long due.