Dubai’s handling of debt crisis has lessons for Greece

The battle over Greek debts was going down to the wire yesterday, it seems. Maybe the government of Alexis Tsipras will come up with a formula to avoid financial disaster, and maybe it won’t.

Whichever the outcome, the story that has unfolded over the past few weeks has been a fascinating illustration of the changing nature of indebtedness in the modern financial world.

Dubai, with a history of successful debt restructuring though still indebted to the tune of $140 billion according to the IMF, should be a case study for the Greeks.

Most commentators have noticed a new realism on the Greek side in recent days as the prospect of a run on banks, capital controls and financial collapse has drawn ever nearer. But the reason for this new mood in Athens has not been the threat of a “Grexit” from the single currency or the European Union, voluntarily or otherwise. The impetus towards some kind of compromise has instead been a realisation on the part of individuals that their own situation could get a lot worse in the event of a national collapse.

Previously well-heeled Athenians sitting nervously by the poolside are contemplating an end to summer holidays in France or Italy, or removing their children from expensive private schools, or even the forced sale of personal valuables.

Their foreboding must have communicated itself to the government negotiating team. In the early stages of the debt negotiations, most Greek people, certainly the multitudes who had voted for Syriza, had a gung-ho attitude towards it. “Can’t pay, won’t pay” summed it up, regardless of the consequences.

Slowly, people have realised that there is a complementarity to personal and sovereign debt that has serious negative repercussions for their lives and standards of living. In other words, if the country goes bust, so do we.

That might seem like common sense, but it’s not really that obvious. If an individual gets into financial trouble, the possibility of action by creditors is an instant threat. They can take legal action, they can seize assets, they can (in some countries including the UAE) begin criminal proceedings that can result in imprisonment.

For sovereign states, it’s different. By the very definition of sovereignty, international creditors cannot march into a country and seize its assets as debt repayment.

Two eminent economists, Jeremy Bulow and Kenneth Rogoff, recently posed the question in relation to sovereign default and asked: “What can foreign creditors really do to a country that does not repay its debts in full?”

The answer lies not in legal action by foreign creditors, although there is a limited scope for this. Most sovereign entities and government officials have assets in foreign jurisdictions, and courts can and do seize these assets.

Witness the recent howls of outrage by the Russians when courts in France and Belgium threatened to freeze bank accounts of Russian diplomats and other citizens over the Yukos affair, in which an international court has alleged shareholders were chivvied out of their cash by the Russian government.

That is an exception, however. Most sovereigns try to repay their debts, or at least reach a deal to defer and reduce their total liabilities, for the simple reason that one day they will want to borrow more.

Mr Bulow and Mr Rogoff say that in the Greek case, and with Argentina also going through sovereign debt renegotiations, the main motive for agreed debt repayment is the threat of damage to their financial reputation, and hence future creditworthiness.

Back in 2009, Dubai realised this very early on. When Dubai World sought a $25bn standstill, many creditors would have immediately perceived the threat of default. The emirate, reliant on credit to fund its ongoing economic expansion, took urgent steps to minimise this threat – an injection of liquidity from Abu Dhabi, the establishment of a formal mechanism for debt restructuring, the promise of asset sales to cover the obligations, wherever possible.

There was never any serious signs of “can’t pay, won’t pay”.

The default threat was averted and international banks were happy to refinance the debts and extend credit to the emirate once more.

The Greeks, dragged kicking and screaming to the negotiating table under the direst threat, should have taken note a long time ago

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