Default is the ultimate reputation risk

November 27, 2009 |

Author sholto

In the global financial world, default is the ultimate reputation risk if you rely on those markets for your funding. Dubai, long the poster child for the modernising Gulf states is just the latest Gulf state to stick a finger up at investors after Kuwait’s Global Investment and Investment Dar (both financial firms) defaulted in January 2009. Certain Saudi merchant families with huge loans outstanding look likely to be next.

The problem with default in these autocratic states is that they still don’t get it and think that they have the right to change the rules for creditors when it suits them. In the short term, there is little that creditors can do except fume and follow the long and usually hopeless path to legal settlement.

Investors can have long memories and there is going to be little appetite for investing in these states in the short to medium term now that financial institutions cannot layoff the debt as they used to. Times have changed.

A few years ago, a bank could fund any half baked project, collect a massive transaction fee and lay off the debt on some poor sucker somewhere else who was left holding the baby.

Well, we already know that banks are velaciraptors and treat their statements with hard won cynicism, but we also know that the Gulf may have oil but they also have legal systems that prefer locals to foreigners and an instinct to change the rules as they see fit.

Default usually reveals something else: either you have no friends or the bargain your “friends” are offering is just too steep. In the case of Dubai, it looks like maybe Qatar and Abu Dhabi have asked for a pound of flesh in return for support. For the playboys royal family in Dubai, maybe that is a pound too much.