Published on the Business Today, issue Wednesday, 16 December 2009
With less than ten days to Christmas, it is sad to note that the European financial scene is not geared up for the usual cheer and bonanza associated with the season. Too much turbulence has hit the headlines while political leaders are struggling to steer confidence and shy away from the people’s perception of doom and gloom. Returning from the EU summit Prime Minister Lawrence Gonzi has cheerfully predicted that by next June the island’s finances will be secure as he predicts that we would be out of the recession by mid next year. It’s quite a bold prediction and one hopes that along with similar political promises it bears some truth since we see that other Eurozone countries are still struggling, while some say recovery will be weak and at worst may follow a double dip recovery.
But certainly we are not yet out of the woods, not with tourism and exports still on a downward trend while unemployment is creeping albeit slowly up. Again since Independence politicians have promised more than we could afford with such luxuries as free education and healthcare not to forget a bloated civil service which acts as a natural shelter for structural unemployment. It is true that this artificial setup conjures a feel good factor.
All this has improved immensely our standard of living, but it also came at a cost. With national debt approaching the 70 per cent of GDP and with debt servicing cost exceeding our educational budget, something has to give.
Our political system with its two-party system is so finely balanced that politicians promise heaven on earth to be elected and in doing so drum up a feeling of déjà vu that promises only last until the day the election result is announced.
To finance such promises meant more taxes and more debt. All this is not exclusive to us since similar excesses can be seen in other Eurozone countries as we shall see later on in this article. Let us not forget the shocking news about the Dubai faltering on its bond repayment. This on its own cannot but add to the list of electoral promises that went astray. Let me explain the connection: In 2007, the government signed a much hyped contract with Tecom (a subsidiary of Sheik Mohammed’s own assets) to sell MaltaCom and to pave the way for a US$300 investment in SmartCity with a guaranteed generation of 5,600 jobs in the ICT sector. A substantial tract of land was allocated at a concessionary rate to construct a number of offices, a hotel and luxury seafront villas to accommodate the new ICT industrialists. Following the default notice of one of the Dubai‘s conglomerates, it was inevitable that a feeling of “Schadenfreude” crept into in the air by the so called ‘Jeremiahs’ who somewhat doubted from the outset the viability of this ambitious venture.
Let us hope that the project is salvaged, otherwise one may suspect that its fate will take a similar course to other land speculation deals by property barons. One recalls how sea front plots were granted on a 100 year lease to local investors as concessions in the sixties to kick start the tourism industry. Over the years owners pleaded with governments to let them pull down such hotels and convert them into luxury condominiums and marinas. (It’s a simple rags to riches formula). Back to Dubai and our indigenous worries dwarf when compared to the shock suffered by the western markets. Both the Dubai and Abu Dhabi stock markets were buffeted by the fallout of Dubai’s debt woes.
Certainly with property values plummeting by more than 50 per cent it is to be expected that the miracle-city built out of the desert has witnessed its reality check. This it is an unexpected shock for creditors of Dubai World and Nakheel, builder of its palm-shaped islands. Surprisingly now, the wonder Arab-boy of the Gulf wants to restructure its debts.
Meanwhile Abu Dhabi, the oil-rich capital of the United Arab Emirates, will “pick and choose” how to assist debt-laden neighbour Dubai, a senior official said last week, after fears of a Dubai default sent global markets reeling. Many took for granted that Abu Dhabi will come to the rescue. But the latest statement from an official of the government of Abu Dhabi says “We will look at Dubai’s commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts.”
One hopes that the proposed Smart City project in Malta will not falter although rumours have it that its management has been refused loan facilities when it recently applied for such credit from local banks. Paradoxically Tecom had pledged to invest US$300 million of its own funds in return for land at Ricasoli amid other concessions and one hopes that such pledges will not be broken during this delicate stage when Tecom’s parent company is itself going through a restructuring phase. Malta needs the jobs.
Yet our woes are dwarfed by what one sees in other Euro zone members such as Ireland and Greece although this should not be quoted as a God given consolation by our party apologists. Both countries have been rumoured to consider exiting the euro. Greece faces a Herculean task to trim its excessive deficits. Can it succeed in trimming excesses of the past decades by curbing public expenditure and restructuring the economy? One wonders. Its Prime Minister George Papandreou vowed to “revamp the Greek economy, to modernise the public sector, to fight chronic problems such as corruption and to make sure we have a sound, viable economy.” All such pledges are common to the policy statements uttered ad nauseam by our own politicians.
The stark truth is that Greek government has to trim down a debt of €300 billion. One can well question if the Mandarins at the Commission were sleeping at the job and have overlooked the gravity of Greece’s repeated infringement of rules as a Eurozone member. Some even question the futility of imposing any hefty financial penalties on the Greek government. Analysts have interpreted such hyped political reaction as a precursor to the sort of bail-out request similar to the assistance offered last year to Hungary, Latvia and Romania. This not to forget mounting deficit worries now extending to Ireland and Spain. As can be expected none of the working classes want to swallow the bitter medicine or take the blame for the mismanagement of elected politicians.
Greece’s public deficit will surge to 12.7 per cent of GDP and that debt spiral to 113 per cent of gross domestic product (unashamedly this compares to 70 % 0f ours). Fears grew around Europe that the Greek financial crisis could have a dangerous systemic effect for the whole of the Eurozone.
Greece’s sovereign debt was instantly downgraded by Fitch, prompting fears of dangerous divergence in the 16 countries which trade in the Euro. Elsewhere Latvia almost collapsed in the wake of the financial and economic crisis, partly because it had not yet joined the euro currency. The Latvian Prime Minister had to cut its expenditure including deducting the public service employees’ wages by 40 per cent and pensions by 20 per cent.
Without any doubt one cannot but worry how much more remedial bailouts have to be doled out. To add to the list of sick countries one cannot forget the ailing economy of Portugal.
During the festive season there is little the Commission can do to add more cheers to the downtrodden members who are suffering from an ill-wind of recession.
One can predict that a major correction is needed to help the members in the sick bay although all this adds to more onerous bailouts by IMF and may in turn endanger the speed of the much awaited recovery.
A very merry Christmas to all readers.