x Abu Dhabi, UAESunday 21 January 2018

Dubai's difference: it hasn't let bankers dictate its fate

When there is no prospect of a publicly financed rescue and liquidation of the entity that owes them money, financial institutions appear to be quite patient.

The world has watched the financial bailouts in the West over the last two years. In the US, they demonstrated that too big to fail means that the taxpayer foots the bill. Similarly, European taxpayers will be paying for bailouts of Greece and Ireland for years to come. Larger European bailouts may loom on the horizon.

Apparently, in the "free market" West, debt holders and others who took big risks have their bad choices socialised. For example, the investment bank Goldman Sachs received billions to the cover credit default swaps that they had purchased when the US treasury rescued the insurance giant AIG.

A very different approach was on display in Dubai, where an open forum was held last week. For the first time in months, representatives of the government and major entities with billion-dollar obligations to financial institutions held court with reporters. Key decision makers reported their optimism, particularly since it appears that tourism and trade are beginning to recover, but few details were provided.

Such an event suggests that the terms that financial institutions are willing to offer for debt restructuring are far better when no government bailout is forthcoming. When there is no prospect of a publicly financed rescue and liquidation of the entity that owes them money, financial institutions appear to be quite patient. They are willing to cooperate while a large debtor considers when and which assets will be sold to pay them.

Instead of being hounded by creditors and haunted by the looming threat of forced bankruptcy, those responsible for enterprises with billions in debt on their balance sheets are being chased by investment bankers who want to help them sell assets and restructure their payments. This process also gives government-related entities more time, helping to avoid any panic or fire-sale. Indeed, the committee that is considering the sale of stakes in some Dubai enterprises to repay debts indicated that they would only sell for the right return. The prospect of being able to buy stakes in some of Dubai's most prized assets left the audience focused on that future possibility rather than the difficult restructuring task ahead.

Contrasting the restructuring of Dubai's debts with the bailouts in the West provides some interesting insights. State actors in the West, reputed to be powerful players on the world financial scene, actually acceded to the demands of banks and financiers. Despite having made the mess, financial executives were able to dictate the terms of how it would be cleaned up.

After receiving billions from the AIG bailout, Goldman Sachs made a big show of using a tiny portion of this cash to repay government loans that they had received at the height of the crisis. They then proceeded to pay generous bonuses to the very executives who had contributed to the crisis. It seems that being able to ensure that the government covers your losses is an important part of effective managerial performance in the capitalist, democratic US.

Throughout Europe and North America, few high level executives lost their jobs despite occupying important roles in creating the global financial crisis. It was also this downturn, of course, that contributed to the situation in Dubai and has resulted in the worst economic calamity since the Great Depression.

By contrast, Dubai, like Malaysia during the 1997 currency crisis, refused to do what the banks and financiers demanded. Decision makers in Dubai have followed their own counsel. In so doing, they have demonstrated that the demands of financiers are open to negotiation and that the terms can be fairly different when government coffers are not open for the relief of bankers.

My point here is not to offer a complete analysis of how this will ultimately affect the ability of Dubai and its core companies to participate in world financial markets. However, when the naysayers spin their worst-case scenarios, I am reminded that many of the same talking heads were ready to write off Malaysia after it took its own course during the Asian financial crisis of 1997.

More immediately, I am watching the wrenching and damaging restructuring of debt that is taking shape in the West. They might spend some time taking note of what is happening here. There might be some benefit to the take-it-or-leave-it model of restructuring that is being pursued in Dubai.


Stephen Mezias is professor of entrepreneurship and family enterprise and The Abu Dhabi Commercial Bank chaired professor in international management at INSEAD Abu Dhabi. He also serves as the school's academic director