THERE'S NO SMOKE WITHOUT FIRE

Undercurrents, which occasionally stir the already turbulent waters of the current global economic crisis, have caused another wave of panic and pessimism about its likely duration. Dubai has asked creditors to defer collection of debts owed by the state-owned company Dubai World - the reckless credit boom, symbolized by a man-made island in the form of a palm tree with luxury villas and hotels, ended, as usual, in a default which immediately impacted on world financial markets. The media carried screaming headlines about a second phase of the crisis, analysts replaced their optimistic tones with more cautious ones, while investors and entrepreneurs froze in anticipation of announcements about another business giant going bankrupt. Either way, major credit pyramids, collapsing one after another, have completely convinced all conservatives that it is time to change the world's financial and economic models of governance.

Island of bad luck

Dubai's rulers have, indeed, managed to turn their tiny emirate into a city of legend: buildings of glass and concrete stretch to the sky, roads full of expensive luxury cars, expensive shop windows in the world's largest shopping malls, countless tower cranes and mosques. Tourists from all over the world gladly fell, and are still falling, for this tale, for the rather liberal cost of luxury hotels, the opportunity to relax in style on a beach for the New Year holiday or go on a shopping spree etc. In other words, the emirate's success was only to be envied - the crowds of tourists and investors from all over the world, major construction projects and the ability to combine eastern luxury and the latest technological advances. Few would have thought that this was simply a myth that could dissipate almost overnight - then Dubai World announced a technical default on its debt obligations.

This state corporation controls the DP World international maritime ports operator, the British shipping company P&O, the Istithmar investment company, the MGM Mirage chain of casinos and the US retailer Barneys New York. However, the best known part of the group is the Nakheel state construction company, which is the main developer on the coast of Dubai and its islands. It was Nakheel's debts which caused the world's markets to panic. It all began once property in Dubai ceased to attract buyers - last year the villas at Palm Jumeirah, the artificial island in the form of a palm tree, the most luxurious project launched by Dubai World and playing the leading role in the current stock market panic, were offered for almost nothing on condition that payments started in five years' time.

The total outstanding debt owed by Dubai and its companies was estimated to be $80 billion in the summer; the figure is now higher. And most of the debt, $59 billion, rests with the state conglomerate Dubai World. On 14 December, Nakheel was scheduled to repay debts on Islamic bonds with a nominal income of 5.5 per cent, amounting to $3.5 billion but, judging by recent statements, it is unlikely to be able to do so by the deadline, or in the foreseeable future.

The statement by Dubai World led to a rapid decline on world stock exchanges. Investors, fearing for the safety of their funds, are dumping their shares in the largest banks of Europe and Asia, which are members of the consortium of creditors of the Dubai company. According to the Citigroup company of analysts, they include such banking giants as Britain's HSBC and Standard Chartered, as well as Japan's Mitsubishi UFJ Financial and Sumitomo Mitsui.

We have to say that the Dubai government immediately denied the Dubai World direct funding to address the debt, instead offering support directly to its creditors by issuing cheap credit. The foundation announced the restructuring of its debt and asked creditors for deferment. The British banks HSBC, Standard Chartered, Lloyds and Royal Bank of Scotland agreed to restructure Dubai World's debt, requesting, however, that the fund provide more complete data about the terms on which the billions of dollars of debt will be restructured.

Meanwhile, analysts fear that the bubble which destroyed the US bank Lehman Brothers a year ago, may burst in Dubai. The Lehman Brothers bankruptcy is regarded as the starting point of the world crisis. Thus there were some gloomy predictions about a second wave of economic problems. Moreover, as analysts of CMA DataVision (Credit Market Analysis) rightly noted, the Dubai episode came at a very bad time. In the last few months, the world's financial markets have been growing and investors have been counting profits. Experts believe that when this boom is behind us, we can expect new defaults, not only in emerging markets, but also in countries where real estate value has been rising incredibly rapidly.

A sharp turn

The "Dubai tale" once again made the world think about drastic changes to economic policy. Perhaps, the most sensational step in this direction will be taken in the near future by Russia, which will convert part of its international reserves into Canadian dollars - at least Russia's Central Bank has made an official statement to that effect. This is a rather original step by Russia's Central Bank. The Canadian dollar was the first to react - it immediately rose (albeit briefly) against the dollar. The latter, by contrast, fell, in some markets quite significantly. For example, in Tokyo the exchange rate of the US currency fell to its lowest point since July 1995.

Russian analysts argue that the reason for this statement was a perfectly understandable desire to protect Russia's reserves. Currently, US dollars account for 47 per cent of Russian foreign exchange reserves and the Central Bank is trying to reduce its dependence on the "greenback", whose prospects inspire less confidence against the background of the continuing growth of the US national debt (now more than $12 trillion) and the budget deficit ($1.4 trillion - a post-war record).

In addition, lending to the US by buying its currency and securities is simply unprofitable: the Federal Reserve System says that the gradual decline of the dollar will continue, and US government bonds have become too low-yield as an investment due to extremely low interest rates. So as the world economy emerges from crisis, capital will increasingly leave these "shelters".

Western economists believe that, in this case, Russia has political aims, trying to exert pressure in certain areas on President Barack Obama. After all, it was Obama who announced the end of the crisis and seeks the glory of being the president who overcame the global challenge to the economy. The loss of the dollar's image certainly does not fit into these plans, although there are suspicions that the US is deliberately depreciating its currency to increase the competitiveness of American manufacturers. That is why Europe is cautious about any kind of dollar-euro speculation.

However, Russia, has already made a move against the US currency. The question may arise: why was the Canadian dollar chosen as Russia's new reserve currency? First, because the Canadian economy demonstrates good stability, even in times of crisis. Second, the Canadian dollar is slowly but surely rising in value. Since early 2006, the rate against its American namesake has risen by 8.4 per cent and against the rouble - by 11.04 per cent. Ten-year Canadian government bonds now have roughly the same yield as US bonds (3.28 per cent versus 3.34 per cent). And third, the choice was not so great. The Central Bank of Russia was thinking of choosing the Swiss franc, but gave up, because its market capacity is limited. However, even Canadian experts are disinclined to overestimate the prospects of their dollar becoming a world reserve currency. "The market for the Canadian dollar is too small and illiquid for the currency to become an important component of reserves," said Professor Maurice Levi of the University of British Columbia. Russian experts believe that the Canadian dollar is unlikely to exceed 5 per cent of its reserves.

In any case, analysts note, the current situation with the dollar shows the fragility of the stabilization of decline proclaimed by major world leaders, who have been declaring in recent months that the crisis, in essence, has been overcome. A relatively small threat in Dubai was enough for panic to set in again on stock markets (although, of course, on a much smaller scale than last year). That is to say that it is too early to announce that the crisis has been overcome. A new decline may follow.

However, such assumptions have been made by Mikhail Khazin, well-known economist and president of the Neocons consulting company, who, however, believes that a collapse of the dollar area may occur as part of the process of the crisis and only then can we talk about the introduction of a new, alternative world currency.

The latest developments in the global economy confirm Khazin's predictions that the economic crisis will continue for at least another 5-6 years and that it is necessary to create a new economic model of governance. In his recent statements, the Russian economist compared the global economy in its current condition with a chicken hatching from an egg. "The old model of growth based on the lending rate has exhausted itself. And the crisis will last until a new one emerges. Or the standard of living and development in the world will return to the levels of the 1950s-70s and then return to this point," considers Khazin. In any case, the world will not see better times after the crisis - "a great depression" will set in, and the transformation of financial capitalism will end in what Khazin calls "Orthodox or Muslim socialism".

We have to wait a little longer to see whether these pessimistic forecasts come true or not - developments in economic events over the next year should dot the i's and cross the t's.