Ireland and Dubai

Paul Sweeney: The Irish economy could collapse? Is this possible? The editorial in Saturday’s Financial Times (28th November 2009), on Dubai, implied that it was possible.

It said: "Markets will not soon return to the panic of September 2008: the financial sector now has state backstops. But because of these guarantees, fearful investors have started to worry about how safe sovereign debt is. Investors are growing nervous about Greece and Ireland in particular."

Last week, interest rates on Greek and Irish government bonds rose, whereas they fell for many other states.

The fall of Dubai is another blow to the neo-liberal economic paradigm. Dubai was hailed as the golden boy of free market capitalism ... which it was not. The myth of free markets, low taxes and no regulation was underwritten at every turn by the Dubai state itself.

Only a few weeks ago, Dubai was selling itself as a threat to the 'over-regulated and over-taxed' City of London. Not alone had Dubai weathered the global financial hurricane, but it was the place for mobile firms to go to avoid regulation and taxes, according to the Dubai International Financial Centre, in a gig two weeks ago in London.

The link between Ireland and Dubai is that Dubai's collapse has focused attention on Ireland (and Greece) as potential defaulters on sovereign debt.

This is not likely. Yes, the government’s guarantees to the banks were risky, NAMA is risky; but we are in the EU; in the Euro; sit on the ECB board; we already have €31bn in state borrowing ready for next year, and don’t really need to go to the markets for more borrowings. Most of the economy is still sound (aside from banking and construction, and both are being sorted - sort of). But markets are fickle. They are too often run by lemmings who all follow each other (over the cliff, occasionally), and the current scare on Ireland is misplaced.

Dubai is an autocratic desert state which only gets 2% of its revenue from oil and gas. The rest is construction, retailing and wholesaling – hardly leading economic sectors.

Dubai was also hoping to attract investment in its banks. It was planning to be a safe haven for rich people running from volatile areas. By implication, it was after illicit money from drugs, tax evasion and crime. Now that Switzerland is finally being hammered on its bank secrecy laws by the OECD, the US and the EU, new havens like Dubai were not welcomed by those of us who pay our taxes and want to continue the move from casino capitalism.

It is run by an autocrat, Sheik Mohammed al Maktoum, who has a few horses here. It is run with little transparency.

The indoor desert ski resorts, palm-shaped reclaimed islands - not to mention the 'World of Islands' - should, like Sean Dunne’s Ballsbridge ego-mania, have warned off any potential investors with sense. It had tried to diversify into tourism, property, tax free zones, trade, transport and banking, but was wildly over-optimistic.

Dubai has debts of $80bn - a huge amount for a small country. It is now (after a delay) being helped out by Abu Dubai, within the United Arab Emirates, because it is thought the autocratic ruler Maktoum did not want to admit the model of free-wheeling desert capitalism had failed.

Dubai’s collapse wiped a significant 2.3 per cent of the FT100 and 3.8 per cent off the Nikkei, and yields on bonds also fell significantly.

Ireland has a sea of troubles but, if we can pull together and deal with them equitably, we won't fall as far as Dubai. The extension of the Recovery Period beyond 2013, advocated by the Congress of Trade Unions, opposed by all classical economists (we [we?] must have lots of harsh pain, quickly, for redemption!) and quietly conceded by Government, is a very hopeful sign. A less deflationary Budget will also help us recover faster.