x Abu Dhabi, UAEFriday 19 January 2018

Bean counters should resolve to face the pain now

New Year's Day is perhaps the most important holiday of the year in Japan. It coincides with a week of house scrubbing, temple offerings and other gestures.

New Year's Day is perhaps the most important holiday of the year in Japan. It coincides with a week of house scrubbing, temple offerings and other gestures that mark a break with the past - a clean slate. The Japanese used to celebrate the lunar new year with the rest of East Asia, but in 1873 decided to observe the Gregorian calendar as part of an effort to ward off western imperialist conquest by dropping their feudal ways and emulating the modern nations that threatened to colonise them.

One New Year's custom left behind in the switch is the old bean-throwing festival. Now celebrated on about February 3, this involves tossing dried soybeans around the house to expel last year's demons. Demons are, of course, terrified of beans and the magic expulsions people can summon from them. When Japan was still on the lunar calendar, bean-throwing coincided with all of the spiritual renewal that now takes place on about January 1. Modern Japan's new year's ablutions leave last year's accumulated demons lurking about for an entire month before they are finally bounced.

The same kind of procrastination hampered Japan's recovery after the collapse of its bubble economy in the early 1990s. The Japanese decided to print enough yen to make a more painful restructuring of the economy unnecessary. The banking and corporate landscape changed but too slowly to unlock the genie of economic revival. Japan spent a decade in an economic mire from which it still has not completely emerged.

Many economists fear that the US may be making a similar mistake. By relying on low interest rates and government spending, the Federal Reserve and the US Treasury have succeeded in turning back the financial crisis and what was shaping up to become a new Depression. But in doing so, economists warn, they may have simply set up the economy for yet another tumble in the near future. The danger, economists say, is that the Fed mucks up its dismount.

If it keeps feeding cash to the moribund economy it risks creating stagflation, or runaway inflation, if growth revives. And if it takes the stimulus away it risks watching the US economy sink right back into recession. Yet faced with the threat of inflation, the US is preparing to start draining its stimulus, even though the economy cannot yet stand on its own. The Fed is already talking about ways to drain cash from the system.

@Body-Answer2 :And Paul Krugman, the Economics Nobel laureate columnist for The New York Times, warns that outlays of government stimulus will start dwindling in the second half of next year, raising the risk that the US will again sink into recession. The economy may have been made healthier more quickly, critics say, if the US had compelled them to sell off non-performing assets at a discount to the government for the cash they needed to stay afloat, forcing them to take huge losses that would have pushed them to consolidate, sell new shares or go bust.

It would have been much more painful in terms of immediate bankruptcies and job losses, but would have unlocked capital for more productive use and more rapid recovery. Initial plans last year to use taxpayer funds to buy up bad assets from beleaguered banks, however, never really got off the ground. Those funds were instead used to simply inject capital into the banks. Banks used their government largesse to offset the red ink submerging their balance sheets. Now they are paying back the US Government and giving big bonuses on the profits they earned, not risking taxpayer funds on job creation.

Faced with deciding between the immediate trauma of even greater job losses and bankruptcies, or raising the long-term costs to the taxpayer in terms of a higher government deficit and a weaker dollar, America's politicians found it more expedient to delay the pain. US politicians, after all, face re-election more frequently than most US bonds have to be refinanced. It is important, therefore, that the UAE has apparently decided not to follow in Japan and Washington's footsteps. After injecting capital to shore up the banking system this year during the worst of the crisis, the latest chapter in recovering here involves taking some painful remedial measures.

Abu Dhabi's purchase of US$10 billion (Dh36.73bn) of Dubai bonds carried with it the proviso that Dubai World's creditors agree to restructure some of its debts. Dubai World's may not be the last. Restructuring is, after all, part of trimming yesterday's debts to reflect today's diminished growth prospects. The UAE can afford to take the pain. The threat of growing numbers of jobless imposes little burden here, as most of those without a job simply fly home. And paying debts that business conditions no longer support makes no sense, since most of those owed money are foreign. Bailing them out would be sending funds straight overseas.

With no bailout at hand, that leaves three options for borrowers such as Dubai World and their creditors: delay the pain by extending interest payments; take the pain now by forgiving some principal; or work out a combination of the two. Any of these options will require shared suffering. Creditors may need to take a haircut. But Dubai's big borrowers will also need to sell assets to raise cash. Many companies will be reluctant to sell at distressed prices, particularly when a declining dollar is pushing up asset prices everywhere.

The Dubai Financial Support Fund may offer a stopgap: it has the power to buy up assets in return for rescue funds. The fund could buy assets at a discount for quick cash and sell them later when, hopefully, their values have recovered some ground. Dubai's restructuring has sparked talk in some quarters of a new debt crisis. But restructuring is part of the rebuilding process; a healthy but painful step towards exorcising the excesses of the economy and putting it on a more sustainable growth path for next year.

Someone break out the beans. @Email:warnold@thenational.ae