Moral hazard, what moral hazard?

Two-and-a-half years into the credit crunch, another $20 billion for a couple of bailouts that have seen the profligate escape any sort of opprobrium, for the umpteenth time.

The crunch may be over in the minds of bonus-focused bankers, but the horrible reality that it’s still alive and merely resting (unlike the legendary Norwegian Blue).

Risk is back in fashion, bonuses are there to be grabbed, so what’s another $US20 billion when one of the richest countries in the world in Dubai needs a helping hand, and a small bank in Austria is rescued in a series of trans-national deals, which take billions of fresh capital, losses and credit lines to bed down.

It is a very timely reminder that for all the spin from American and European banks that the worst is over, the grim reality is that it isn’t; the crisis is now in another form, attacking weak sovereign states such as Dubai and Greece, with the odd weakened bank such as  the one in Austria, thrown in. American bankers, rescued from their own follies, are talking up the rebound, and yet 133 banks have failed in the country up to last Friday night.

Dubai was bailed out by Abu Dhabi to the tune of $US10 billion, taking the total extent of aid to $US25 billion in the past 10 months. If Dubai’s reported $US80 billion in debts is accurate, the bailout totals 32 cents in the dollar, which is getting towards the levels of some of the busted banks such as Citi and Bank of America (losses and government bailout).

The Austrian government, in taking control of the country’s sixth biggest bank, put together a deal that could total $US10 billion in fresh capital, losses and other aid for the rescued bank. It’s the second nationalisation in Austria in this crisis, and has a strong link to a stricken state bank in the German state of Bavaria.

Dubai’s bailout confirms that it is completely broke and can’t pay its way. The Austrian takeover of the Hypo Alpe- Adria Bank International has triggered further losses of about €2.3 billion at the Bavarian state bank, BayernLB, which had owned 67% of Hypo Alpe, which was a big lender in Austria, Croatia and other parts of the old Yugoslavia.

All up the bailout involves 1.5 billion in fresh capital from Hype Alpe’s shareholders, BayernLB sold its stake to the Austrian government for €1  and will take a €2.3 billion loss, and will provide an ongoing 3 billion line of credit. Hypo bank and Bayern will now be forced to report huge losses estimated in the billions of euros. And that will add to the woes of the Bavarian state in Germany, which, only a year ago, bailed out Bayern to the tune of €14.8 billion.

Big losses will also be forced on an Austrian insurance company and on the state of Carinthia because their stakes in Hypo Alpe are worthless and they have had to provide more money.

Dubai’s bailout was the most dramatic, coming only hours before property group Nakheel was expected to default on a $US3.25 billion Islamic bond (or sukuk) repayment that fell due from yesterday. The bond will be repaid before the two-week grace period expires on December 28.

The Dubai deal and its dramatic last-minute surprise has for the time being calmed market nerves about a possible default, but those fears won’t vanish completely until a more detailed statement is released on the debt position of all borrowers owned by the government.

Iceland’s implosion last year didn’t have this drama. No, the spendthrifts of Dubai are in a class of their own, ignorant of the dangers of borrowing short and lending long, especially in real estate.

In a statement the Dubai government said “the government of Abu Dhabi has agreed to fund $10 billion to the Dubai Financial Support Fund that will be used to satisfy a series of upcoming obligations on Dubai World. As a first action for the new fund, the government of Dubai has authorised $4.1 billion to be used to pay the sukuk obligations that are due today.

“The remaining funds would also provide for interest expenses and company working capital through April 30, 2010 — conditioned on the company being successful in negotiating a standstill as previously announced.”

Earlier Bloomberg has reported that a further $US1.75 billion in extra debt could be involved if the $US3.5 billion issue fell over because of cross default clauses.

The Financial Times quoted a spokesman for Dubai as saying: “The whole capital structure was a web of cross-defaults — the only way to calm this was to pay off the sukuk,” meaning that the Bloomberg report was on the money and there was no way any debt rescheduling could have been achieved with triggering other defaults, which then may have triggered a cascading set of collapses and failures to pay that could have seen Dubai implode this week.

In February, Dubai raised $US10 billion (half of a $US20 billion bond issue) from the UAE central bank and another $US5 billion was raised from Abu Dhabi banks on November 25, only hours before the Dubai government shocked the world markets by blithely issuing a statement requesting a six-month debt standstill for Dubai World, which controls Nakheel and has debts of $US26 billion.

As well the UAE central bank will help support local banks, many of which hold some of Dubai World’s distressed huge debts, not to mention as well as other debts at its more profitable DP World and Jebel Ali Free Zone units.

And the Dubai government must know that the prospects for Dubai World, Nakheel and perhaps some other companies look grim because the same statement revealed plans to revamp the bankruptcy law at the Dubai International Financial Centre, an offshore zone, to handle the possibility that Dubai World has to be put into liquidation.

And yet the ruler of Dubai, Sheikh Mohammed said just two weeks ago

“This company is independent of the government. This exaggerated media uproar will not affect our determination. It is only natural that we should oppose this campaign [to provide state support to Dubai World] and this huge media uproar.”

So much for the royal word. His royalness won’t give up his racehorse empire around the world, nor his palaces or expensive homes. It’s one rule for me and others for everyone else.

All up both bailouts could quite easily top $US20 billion. But that will be less than two thirds the cost this year of the failed 133 banks in the US up to last weekend. Who says the crunch has gone, it’s got new lame ducks to prey on. Next Greece.

Peter Fray

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