Nov 28 2009
Will UK taxpayers pay for Dubai property?
It was good of some British footballers to go to the aid of property developers and the Dubai government when they started selling their Palm Jumeirah development at fancy prices. It was a way of recycling their cash through the world economy. Their private money is their concern, and let’s hope they are at least enjoying the sunshine. Well done to any of them who got out before the Dubai property bubble burst.
The more worrying issue, is will British taxpayers be expected to bail out this development as well? Has RBS lent large sums to the government of Dubai and its property and development arms? If so, what are the prospects for getting the money back? How long is the moratorium going to be on payments? Will we lose interest income permanently? Might we lose some or all of the capital?
The shock that the Dubai announcement offered to world markets is a timely reminder that the banking crisis is not yet resolved. We know that governments will stand behind the main banks, so depositors need not panic in these cases. We also know that the banks are sitting on a whole series of dodgy loans. The extra shock in the case of Dubai is to be reminded that sovereign risk, lending to governments, does not prevent non payment or delayed payment. In our case in the Uk that means further possible losses for taxpayers, the owners of RBS.
Quite why the Uk government wanted to own RBS and take responsibility for losses on vainglorious overseas projects is beyond me. The fact that the UK and some other western governments do so is almost an incitement to other governments around the world to cut loose from their crazier commitments and let western governments pick up the bill for the losses. If the Uk government had done the minimum to prevent a run on UK deposits, whilst forcing restructuring, asset sales and cost reductions on the bad banks, we would be in a much stronger position by now.
Instead, owning banks will be one long parade of embarrassments. We have had several over bankers pay and bonuses, which continue even under nationalised management. Now we have embarrassing losses, where the public will see that some of RBS’s large loans were for bad projects in far away places. Parliament needs a statement about this on Monday. Doubtless Ministers will ignore yet another case of wasted public money, as it is too embarrassing to admit UK taxpayers are standing treat for luxury property in Dubai.
PS I have just read a piece by Mark Bathgate ( OF Tweeddale) who has looked up the figures. UK banks have lent a massive $50 billion to the UAE/Dubai. We still do not have the figures for how much state bank exposure there is within this to the Dubai property schemes, but they represent a large proportion of total UAE/Dubai debt.
39 Responses to “Will UK taxpayers pay for Dubai property?”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
For me, retail banking should be about certainty. If I trust a High Street bank with my hard-earned cash, the only thing that I ask is that they return it to me whan I want it – that’s the contract.
By the same token, if I borrow money from them, there should be some certainty that they will recover the money from me, subject to the contract. If I can’t make the repayments, I expect them to recover the debt, presumably by forced sale of my assets. They should only lend me the money if there is enough value in the assets to cover the worst case scenario. This is because it is not their money that it is being lent, it is that of the other depositors, and they should be responsible with it. The base of lending should be safe enough and spread thinly enough that any default is proportionally insubstantial.
I don’t care too much if investment banks try for the more adventurous loans, as long as their risk is made clear to me if I want to invest in them, for example, by a pension fund. It’s why I support splitting retail and investment banking – it makes the risk identifiable.
If a retail bank is bringing money in at the rate of hundreds and thousands, from ordinary customers, they should not be risking it in blocks of billions.
All yesterday I was looking for someone to see this. We are underwriting the Royal bank of Scotland and they, according to the BBC are the top banker of Dubai. The BBC also said that the $50 billion was probably not the end of the loan either.
The total debt of Gordon Brown is a mere £200 billion. this means that, at a stroke, we could increase this into £250 billion. That is the sort of sum that we spend on every bit of education in UK or on the NHS.
Staggering incompetence.
But well done for stating it so boldly.
PS I love Dubai very much. It’s magic and the new train set is stupendous.
A depressing read with my Saturday morning coffee!
Surely this government will just have a word in the BoE Governer’s ear and ‘quantitively ease’ another £50bn into the economy over the next 6 months. Problem solved! Dubai bailed out by UK savers.
I really have so little faith in this government that rather than introduce the sensible measures you are suggesting I fear they really will keep the printing presses rolling.
I do think it is terribly short sighted to hire such cheap people as bankers.
How about paying serious money to get folks who could do such things as insisting on heavily dicounted collateral, and written sovereign guarantees for state-backed debtors?
In a gesture of national solidarity, I’m thinking of providing the FSA with copies of “International finance for Dummys”, but I need to commission a primary school class to write it first
MG
As if your gloomy piece isn’t already depressing enough, John, James Palumbo sees the prospect of Britain following Iceland and Dubai down the default path
. The story is here: http://www.dailymail.co.uk/news/article-1231563/Is-Britain-brink-financial-armageddon.html
Ross J Warren Reply:
November 30th, 2009 at 7:26 am
A very sobering link Steve, Thanks
even if it is depressing stuff.
“Vanity of vanities, saith the Preacher, vanity of vanities; all is vanity.” If Only those poor souls who invested so much money in the Dubai property bubble, had headed these words, then maybe they would have avoided placing so many eggs in such a strange venture. Palm Islands that are admittedly impressive when viewed on Google earth, and Islands shaped like a map of the world. An Hotel shaped like a sail boat, this is all pretty juvenile stuff really, it could almost be the work of a child, a beach fantasy. So is this a further knock on from the banking crisis? “developer Nakheel, and its state-owned parent company, have requested a suspension of debt repayments in the short term. This is a sharp reminder that the worldwide credit crunch is not over and there are a number of areas around the world which are still “on the way down”.” In fact this is very bad news for all of us, as British money is involved. How much impact is hard to estimate but some individuals have lost Millions and the grand total will be into the many Billions of Pounds.
“Of all the world’s property crashes, says the Telegraph, Dubai’s has been among the most spectacular. “According to an estimate from Morgan Stanley, projects worth £165 billion have been delayed or cancelled across the United Arab Emirates and Prices in Dubai have fallen by more than 40 per cent since September. All this is very sad as Dubai was hoping to turn itself into a high class holiday destination and financial centre. Still a few brave souls will acquire some “bargains” if they act now. Saying That I would avoid this place like the plague, as the whole concept seems silly at best and lunatic at worst. How long the Islands will stand has never been fully explained to my satisfaction.
Ross J Warren Reply:
November 28th, 2009 at 12:21 pm
Whoops I missed citing those poeple I have quoted so here goes.
First quote:
http://financialadvice.co.uk/news/9/property/12860/Celebrities-hit-by-Dubai-property-crash.html
2nd quote, is in fact indicated and was the telegraph.
I think this was what saving the world meant
Banks involved in time-shares. Why am I not surprised?
It always puzzled me as to what people who where going to live in Dubai were actually going to do between going to the beach and restaurant. Just on this basis I wondered why anyone would ‘invest’ in a daft flat built to unknown standards by (Indentured-ED) labour and dubious land rights. Middle East slums of the future. You only have to listen to some of the horror stories about European holiday homes to know that you could be digging yourself in an even worse hole in that part of the world. Ski resorts in the desert, tallest building in the world all with a completely unsustainable energy consumption. Sustained by footballers. Not viable would be the polite way putting it, most people would put it quite another and now have.
JR: “Quite why the Uk government wanted to own RBS and take responsibility for losses on vainglorious overseas projects is beyond me.”
They are Socialists, ownership of the commanding heights of the economy is in their blood.
When discussing Northern Rock I said they would take this crisis as an opportunity to nationalize, you disagreed the rest is history.
John,
http://www.climatescience.org.nz/images/PDFs/global_warming_nz2.pdf
That’s a link to a pdf where finally,the New Zealand Climate Science Coalition were able to discover what adjustments were made to raw temperature data by a New Zealand Government scientist. Look at the difference line between the raw and adjusted data and read the document.See if you are convinced New Zealand has warmed! The rest of the ongoing ‘Climategate’ scandal can be followed at http://www.wattsupwiththat.com and from there the enquirer can link to many interesting places.John, I’m so angry I can’t speak!
It is a point that you made on this Blog when the Banks were first underwritten by the taxpayer.
Why are we (the taxpayer) taking on the risk of funding/underwriting loans abroad.
Clearly it will not just be Dubai that could default, this may just be the visable tip of a giant debt mountain of as yet unknown size.
These I am afraid are the possible unfortunate consequenses of messing with market forces.
Will be interesting to see how the BBC and the rest of the media play this one or even if it is mentioned.
Seriously, I can’t understand why banking regulation is such a trying problem. Surely it is a simple matter of accounting standards?
How about depreciating loans in the same way as any other capital asset? The depreciation rule would reflect the loan conditions. When the loan is payed off, the bank can book a gain on disposal and take most of the profit then, when the risk has finally gone and the profit has actually been earned.
Boy they won’t like that
MG
What is really alarming is that the liabilities of the banks were taken on board by the British taxpayer without, apparently, any due diligence.
It would have been appropriate to have acquired full disclosure from the boards of the assisted banks of any known or contingent liabilities, before a taxpayer bale out.
Those who were out in Dubai recently, got a clue what was happening. Dubai World was laying off a quarter of its staff and there was an obvious lack of artisans on the building sites.
Further back, last Christmas, you could see the cars that had been abandoned at the airport, being transported to a compound, waiting for the finance companies to come and collect them. There redundant owners having dumped them, and got on a plane to anywhere that does not lock you up for defaulting on a loan.
It is a pity but it is still a fascinating place to visit. Take a trip on the Jumeirah Palm monorail, out to the Atlantis the Palm hotel, plenty of properties to look at, going very cheap, bird in the hand etc. Remember the UAE Dirham is locked to the US Dollar; I wonder how much longer they will keep that up.
The share price falls seem to be out of proportion to what has happened in Dubai, where 1 very large company has asked for a 6 month repayment delay on £2 billion. It suggests the general foundations to be very weak. I hope Dubai does not bail out the company. A good shake out is better than the present policy of printing money to boost “confidence”. Dubai has certainly spent an inordinate amount of money on unnecessarily pretentious building projects. But they have also got a lot right.
Any chance of a link to Mr Bathgate’s article?
mark Reply:
November 29th, 2009 at 6:26 pm
have a look here:-
http://www.bankofengland.co.uk/statistics/cwc/current/index.htm
I would bet my most comfortable trainers (my only real asset) that our nationalised banks have major liabilities in Dubai. Also, because so many of the Labour elite and their sidekicks and famous celebrities, weeping in their client media, are involved, the taxpayers are going to take the hit.
Such a great shame as the intention was to transform the economy of the little state, and invest some of the Oil Billions creating a high quality destination for the well off and a financial centre for the region. Of course it was not just local money that was invested. As a result the British banking sector will suffer further, as it is estimated we are involved up to a disturbing £50,000,000,000. For those brave enough the current depressed state of the housing market, may offer an opportunity as prices have fallen a whopping 40% since September. So for a few bargains are available. It may even fall lower still, and that is in fact certain until it hits a sweet price that encourages the clever money out of retirement. Frankly I would have nothing to do with the Islands scheme as there are to many factors that could undermine the value of the homes on offer. Erosion will happen, most especially if the Islands are not maintained well and a tsunami would of course be a natural disaster of biblical implication. Is the region safe from such events? Don’t be silly of course it is not. I suggest that any one interested in such property look carefully into the regions geological stability, but of course if the values fell to 25% even I would be interested in buying into the juvenile fantasy island concept.
Ross J Warren Reply:
November 28th, 2009 at 2:43 pm
On reading further I would caution those who might see a potential bargin to be very careful indeed
“the Dubai property crash has only just begun which seeks to correct a 6 year property boom. The Dubai construction boom is expected to come to an imminent halt with many partially finished projects littering the landscape as investors walk away from the off plan deposits in the wake of the ongoing crash in property values. It remains to be seen how much of this excess supply will eventually be reclaimed by the desert as many foreign investors in off plan Spanish properties are painfully experiencing. My expectations are for an average 50% retracement in Dubai property prices from the peak, with many of the more over-leveraged high end properties possibly crashing by as much as 75%.” said at:
“http://www.marketoracle.co.uk/Article9297.html”
I apologise for the my relatively large numbers of posts on this subject, but the whole Dubai , building and property boom has always been a interesting subject to me. Let us hope that these problems do not spread into their financial market. The total exposed is still only a tiny fraction of the moneys lost worldwide since the credit crisis started to really bite.
The hope is that the elusive factor they call ‘confidence’ will return. This will restore the belief in property and help to detoxify debt. The banks get privatised at profit to the taxpayer. Hey presto.
There always lurks the suspicion that socialist politicians are inwardly happy at the demise of capitalism and relish the idea of controlling the money supply – an opportunistic coup in the offing.
The sooner banking is out of their hands the better.
We’re having a hard enough time shoring up Britain…
FT Alphaville did a breakdown here:
http://ftalphaville.ft.com/blog/2009/11/27/85801/european-banks-most-exposed-to-uae-debt/
Mainly Standard Chartered, HSBC and Barclays that are exposed according to them.
RBS does apparently have dodgy loans to football clubs though, read:
http://cityunslicker.blogspot.com/2009/11/rangers-sign-of-things-to-come-football.html
I cannot see what you are worrying about John – $50bn is only £30bn or so – that is small change compared to what we are now used to. Governor King just needs to move the red line a bit, hit the button on his computer and £30bn more will be manufactured.
It is great isn’t it? We no longer even have to worry about the speed of the printing presses when we need more cash. Mervyn King creates it and Gordon “Magnanimous” Brown spends it with a big smile and saves the world once again.
Is it stunts like this that allow the PM to look in the mirror every morning with being overwhelmed by terror and guilt about the complete shambles of the UK economy?
I do want the tories to win the election, but I would dearly love a glimpse into an alternate reality where Labour wins, Gordon remains as PM and has to face up to the reality of the situation that he himself has created.
I agree, well said. Its too late now though, we’re on the hook for RBS liabilities and to hell with the taxpayer.
Western goverments thought they could endure the worst financial contraction in the history of mankind without anyone losing a dime. Somebody somewhere has to go bankrupt, its just a matter of time.
It’s good to see that not everyone subscribes to the view that the governments of the world needed to bail out the banks to such a huge extent. As you say protecting the deposits and letting the banks restructure naturally would have saved UK taxpayers trillions of pounds.
banks lend, its what they do
banks if owned and financed by the public still have to lend, thats what banks do, and its the way they make money
what you are really complaining about is not the lending, its the poor risk management of that lending
getting the risk management so badly wrong is the problem, not the lending itself
Perhps our governmentwill become the proud owner of some of the assets, including some modern skyscraper hotels.
Just think of all the civil servants and MPs who would swan off there at the taxpayers’ expense to inspect our asets!
A fact rarely highlighted – and never by the Government – is that the majority of the losses for which the taxpayer is now liable are outside the UK, due to the international scope of RBS. It was unnecessary and foolish to pump equity into RBS and the other banks as you have often pointed out, particularly with no due diligence, so the Government didn’t even know what risks it was taking on for us all. Labour ministers must explain why the UK taxpayer has underwriten the loans of foreign borrowers. The potential losses dwarf even the wasted equity. No wonder the gilts market is getting nervous. We are at real risk of being unable to fund government borrowing once QE stops.
I believe Northern Rock should have been allowed to go under.
The other banks would then have curtailed themselves and held back on the massive bonuses etc.
Brown/Darling saying they would not risk letting a British bank to go to the wall opened the floodgates.
The rest is history and it is still being written as we speak.
Britain is in deep, deep trouble and many of the general public know this, what we don’t know is how are we going to stop it getting worse…which it will.
The Conservatives need to nail their colours to the mast and tell the public what they will do.
Even as a lifelong Conservative I have said often that I am tired of waiting.
I do not take much notice of stories about Cameron and prefer to ‘hear’ what the man himself has to say. You could feel my disappointment when he denied the British electorate their say over Europe.
I think the Conservatives, Labour and the Lib Dems are going to lose the next election and it will be the BNP & UKIP that contribute to that.
No one to blame but the three main parties. We are dying out here and every politician is spouting off about the banks.
Where is our help and support? The banks can continue to pay out massive salaries and bonuses knowing they are taxpayer funded, yet we get nothing…a tv licence reduction, a council tax freeze….wow.
You politicians helped waste our taxes and expect us to vote for you. You have sat back on the opposition benches and let Labour wreck the country.
Give me three reasons why I should give you my endorsement.
Preferably;
1. A referendum on Europe.
2. A halt to government backing of the banks foreign investments
3. Absolute disclosure of every penny of the UK’s debt.
4. Immigration halted and illegals/jailed immigrants deported
5. Prison sentences served in full.
I could list hundreds….just give me three . Please
Thank you.
The BBC & the press in the WEST don’t want to cover this:-
Mike (site ref left out-ed)
The FT has already reported the figures for banks (http://ftalphaville.ft.com/) and (whew!) we may have had a lucky escape. The BISS does not report a breakdown for each emirate (they’re in a currency union, no?) but it seems the UK banks on the hook are Standard Chartered, HSBC and Barclays. RBS and LlHBOS are not in the list.
Your point about taxpayers supporting dodgy overseas borrowers remains good. You might add that historically, penalties for sovereign default are piffling. On average, about 2-3% extra on future borrowings, declining to a nugatory risk premium after five years.
If it’s so cheap, maybe the UK should try it? No, I didn’t really type that, did I?
Totally agree JR…you said it at the time, yet there was no serious debate in the chamber on this most important issue of our time. The govt it seems had already made their feeble-minds up – and therefore must be made to take responsibility for their ill-judged actions – as we as voters must (collectively) take responsibility for the bunch of muppets that have been installed as our government – illegitimate though the leader is.
The figures I have seen touted around are as follows (total amounts invested in UAE):
RBS – $2.2 Bill
Lloyds – $1.6 Bill
So I think RBS and Lloyds are the only ones owned by taxpayer – so say $4 Bill invested in the region – some proportion of which may be at risk. My point is that there should have been a proper audit at the time – still over one year later – with undeniable evidence to suggest there are continuing problems globally – the UK taxpayer still holds such exposure – to what clearly is a bubble market – even before the crisis. Since the govt has so rashly put us on the hook for these exposures, I would like to know what has been done to manage these. We know they are required to keep higher liquidity ratios – throttling lending domestically (except of course to the government – perhaps another bubble in itself – maybe we should ask how much exposure we have to gilts by way of these institutions – I read somewhere that the Bank of England’s own pension fund sold most of its gilts in favour of inflation-linked ones – i don’t know if thats true or not – perhaps they can see where this is going). We know in the case of RBS that the EU-agreed restructuring plan aims to reduce their balance sheet by £300 bill by 2013 (split in £250B non-core and £50B core assets) – (or roughly only 15% of balance sheet @ end 2008 – a staggering £1.9 Trill). But surely there needs to be proper oversight of the taxpayer interest – what about the rest of its holdings/investments/exposures? Episodes like this just show that one year on, despite all the talk and reassurance, no proper oversight or risk management is in place – else we shouldn’t hold such exposure or at the very least there should be some kind of hedge in place. If these state owned banks cannot reduce balance sheet size – properly, in a short space of time (15% by 2013 is not really aggressive), I would like to see hedges (at least partial) in place across all sectors of lending domestically and overseas and in particular investments in risk assets (and indeed gilts) – in order to protect the taxpayer from any further fallout from this or other episodes going forward. Lets face it – asset prices have recovered a great deal and volatility indices have declined a great deal – so to do this would not only be prudent, it could be relatively cheap. Who is talking about this sort of action or approach? Indeed – who is the agency tasked to look after this most vital of national interests? I haven’t seen anything written about this.
As it turns out we may be spared on this occasion – as some reports have said that $60 billion in Dubai World debt may be guaranteed by UAE central bank (read Abu-Dhabi). That is the least we could expect – especially when their sovereign wealth funds (read bank bondholders) have been so generously treated by the UK taxpayer. Hardly tit for tat in terms of commitment – ours is much, much larger.
Next time, we may not be so lucky – what happens if this sort of thing happens in a non oil-rich state, with a weak economy and ‘historically extended’ (a conservative phrase) asset markets and massively over-extended balance sheet (sound familiar)? Just to be clear – does anyone actually know what our exposure is to various asset classes and regions? We only seem to know (or be interested) when confronted with some kind of crisis. I for one would like to know in advance and try to ensure proper strategy to manage these risks is in place. We are currently exposed more than we have ever been, and its clear that even one year on – things are not sorted the way they should be.
Keep up the great work JR.
Bit off topic but of interest. I bought a book the other day “How I Caused The Credit Crunch”. Written by an ex banker it goes into great detail about how all the dodgy derivatives etc were put together and sold and how the whole thing got out of control. A really interesting read. Only £2 in Sainsburys as well so I guess not too many people bought it before it was remaindered.
No responses yet?
You have to take some good some bad.
I have had to listen to Labour for twelve years!
Liam Byrne is quoted as saying:
“You’ll remember that earlier in the year we set out a government-backed way to ensure that any toxic assets held by UK banks were insured”
So that’s a “Yes” then, and probably means another secret loan is already in place.
Of course, it is just protecting the 100,000 British (Taxpayers or non doms?) who got caught in this offshore (!) Ponzi scheme by buying property there. I hope they paid cash, but I fear they secured mortgages.
The losses to the UK taxpayer for guaranteeing loans to Dubai and elsewhere miss the point. We currently have twin deficits, we borrow from abroad to buy goods from abroad.
We base our repayments on,” well we can’t repay the debts now but we will in the future” but not on an existing revenue stream, just on hope.
You could say that about any country. Who wants to use sterling as a store of value? Nobody.
My point is that we cannot pay off these debts, we can only hold them. And next year we can’t convincingly even do that.