Forget Dubai's woes: Iran is the real risk

Allister Heath

BANKS have written down $3 trillion or so over the past couple of years. We should therefore keep the crisis that is engulfing Dubai in some sort of perspective. The total debts of the Dubai government are around $80bn and nobody is suggesting that more than a small proportion will need to be written off.

It is right that complacent markets have been jolted out of their absurd stupor and are now much more worried about sovereign debt. Let us hope that we now see a more realistic pricing of risk. But while the emirate itself is facing a huge challenge – its house prices are thought to have halved during the bust and its reputation has taken a hit – it is not about to collapse. Neither are the Western banks that have operations in Dubai.

The Bank for International Settlements estimates that UK banks are exposed to the tune of $50bn to the United Arab Emirates (UAE), which also includes the likes of Abu Dhabi and Sharjah. But a closer analysis of the positions of UK banks suggests that their exposure to Dubai World, the state-owned firm which triggered all of this off when it asked for a delay to its December Islamic bond payments, is unlikely to be devastating.

HSBC’s loans to UAE-based businesses were worth $15.9bn at the end of the first half of 2009, while – significantly – deposits were at $19.3bn. Yet it has larger operations in many other risky countries around the world, not least China. Goldman Sachs estimates that HSBC’s losses on to Dubai World could hit just $611m, with $177m for Standard Chartered, in both cases a manageable amount.

They would only suffer huge losses if the whole of the emirates were to collapse completely or if they were expropriated, both extremely unlikely outcomes. In the long-term exposure to the Gulf states remains a good thing for ambitious banks: as the price of oil continues to rise and most of the region rakes it in, HSBC and Standard Chartered will soon make up for their lost profits.

RBS’s position is, as ever, more worrying: UAE firms and residents owe it $8.15bn. RBS helped arrange billions of dollars worth of syndicated loans to Dubai World. However, RBS has sold on most of the debt so its losses may not be excessively large. In all cases, it is too soon to tell how big the hit will be – but no foreign bank will be destroyed by Dubai’s crisis or require another bail-out.

The real worry is that a much larger government, such as Greece or Italy, will eventually default, perhaps in a couple of years’ time. Unlike Dubai, this would pose a real systemic threat and would undoubtedly trigger a double-dip global recession – at best.

War and international strife have fortunately played no part in the recession. It would be foolish to assume this will continue, however – I fear 2010 may well be the year when geopolitics, if not outright violent conflict, could once against destabilise global growth.

The most depressing story of the weekend was the announcement by Iran that it is to build 10 new uranium enrichment plants, just two days after the UN’s toothless nuclear watchdog rebuked it for carrying out such work in secret. President Mahmoud Ahmadinejad, an immeasurably greater threat to world stability than Dubai’s debts, is intent on a crazed pride-fuelled escalation of tensions between his country and the West. The markets would be mad to continue to ignore Iran. It is the real Black Swan.