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The Daily Reckoning Weekend Edition Saturday, February 20, 2010 Taipei, Taiwan - Dubai, UAE --------------------------------------------------------------- Governments line up to take part in the great sovereign debt crisis, A few "insider" notes from the Middle East's Tower of Dububble, And the past week's reckonings, neatly archived for your reading pleasure... Joel Bowman, reporting from Taipei, Taiwan... Before we get into today's regular market musings, we thought you might like to see this email, which was sent directly to us by our publisher, Joe Schriefer, yesterday. "Our friends at First Federal have secured a worldwide exclusive on 2010 Perfectly Graded First China Strike Pandas. "'The demand for collectible coins in China is skyrocketing,' says Nick Bruyer, the CEO of First Federal. And, this is the first time ever that the China Mint has released a FIRST STRIKE coin. "While that's pretty cool, here's what's even more impressive: "First Federal has held back the entire stash of these coins for our readers. No one else in the world has this coin. It's truly our most exclusive coin deal ever. "First Federal 'goes public' with this offer on the 25th. Until then, our readers will be the only ones in the world to have the chance at these coins. And based on early sales results from the past couple of days, First Federal estimates we'll be sold out by Tuesday. When they're gone, they're gone. They can't mint more." If you're interested in the deal, Joe included this link. Looks like you've probably got until around Tuesday to grab your loot. Maybe sooner... And now, back to your regular programming... Without doubt, the biggest story of the past couple of weeks has been that of the unfolding sovereign debt crises. We use the plural "crises" because the problems of rotting deficits and of potential defaults are not restricted to any single nation or, for that matter, region. From the PIIGS - Portugal, Ireland, Italy, Greece and Spain - in Europe, to the Tower of Dububble in the Middle East, government balance sheets are laid out like dominoes across the world map. One shakes, falters, threatens to fall...and confidence in neighboring states weakens. Even those "leading" economies in the west - the US, UK, France - are not immune to epic collapse...and that's to say nothing of the world's largest deficit spender (relative to GDP), Japan. The US, for example, got a scare earlier this week when it was revealed that both China and Japan sizably reduced their Treasury holdings during the month of December. As we noted in this space on Wednesday: "According to the US Treasury Department, China, previously America's largest foreign debt holder, sold $34.2 billion in Treasury securities during December. That leaves Japan, with a $768.8 billion stash, as the biggest holder of US government debt. Overall, net purchases of long- term US securities plummeted from $126.4 billion in November to just $63.3 billion in December, according to Treasury figures. Long story short, the most indebted nation in history is having trouble shopping its IOUs around. As a result, yields on long-dated bonds have been creeping gradually higher." Bill Bonner helped put things into perspective in yesterday's column: "The Greek affair is peanuts," Bill observed. "America's ink is so red it looks as though it has cut an artery; this year's deficit alone is $1.6 trillion. Japan, the world's second largest economy, now borrows more than it raises in tax revenues. And while the Greeks run a deficit of 13% of GDP, in the UK the deficit is even higher at 14%." The deeper investors dig into the balance sheets of their own nations and of those abroad, the more tumors they seem to find. And so, as the world braces to discover what it hoped it never would - that what is borrowed must eventually be repaid - we thought it might be a good idea to check back in on one of the first modern economies to reluctantly declare "Game Over," Dubai. Peter Cooper has lived and worked in Dubai for long enough to comment on the situation better than most. He is currently the editor and publisher of Arabian Money. Earlier this week, he sent us his latest thoughts on the unfolding situation in the troubled Emirate. How is the emirate coping now? How are its banks weathering the storm? And, just how much does Dubai actually owe? Herewith, Peter's thoughts... Peter Cooper, reporting from Dubai, UAE... The International Monetary Fund said it estimates the total Dubai debt at around $86 billion, not including what it terms 'bilateral bank loans'. 'Bilateral lending is a bigger concern to us since the scale of lending could be very large and data is practically non-existent,' the bank said in an annual report. The IMF also repeated its stress on the importance of the operational restructuring of the Dubai Government owned entities at the heart of the debt problem, and said it thought the process would take 'sometime'. In raising a red flag on 'bilateral bank loans' the IMF is making an important point. This explains much higher debt estimates such as $170 billion from EFG Hermes. Clearly the larger the debt the bigger the drag on recovery prospects for the UAE as a whole. Late last month the IMF revised its estimate for UAE GDP growth down from 2.4 per cent to near zero. For this to improve the IMF says the Dubai World debt restructuring would have to be concluded more quickly than expected, or the real estate sector recover, or Abu Dhabi spend more. Presently the uncertainty over the Dubai World debt rescheduling is the main block to improved confidence in local financial markets. It is also a very real block for the many businesses in the UAE owed money by the Dubai World subsidiaries Nakheel and Limitless. An early resolution of this matter is certainly far from impossible. The 11th hour Nakheel bond repayment in mid-December came completely out-of-the-blue when most observers had given up all hope, and the international press had Dubai sinking under the weight of its debts. Abu Dhabi could also decide to spend more in a difficult year for the UAE. Its $2.5 billion bailout of Aldar Properties bodes well for a few more surprises. Far less likely is a pick up in the local construction and real estate sector where the supply of new property is overwhelming falling demand. This remains a challenging year for the emirates. UAE bank full-year results for 2009 are in line with expectations, and feature substantial write-offs for the Algosaibi and Saad groups in Saudi Arabia. But the big gorilla in the front drawing room of course remains bank write-offs for the Dubai real estate crash. Dubai World may have declared a $22 billion debt restructuring that brought negative headlines around the world from November 25th to mid- December last year. But Dubai World debt has not yet actually been classified by any UAE bank as non-performing. That said, the Emirates NBD results showing a nine per cent fall in annual net profits to $897 million for 2009 did include the bank's first write-down against Union Properties, Dubai's second largest property developer that is partly owned by the bank. But $86 million is unlikely to be the last write-off against Union Properties. The largest bank in the Gulf States said sovereign debt accounted for 22 per cent of its $58.3 billion loan book, or $12.8 billion of which analysts attribute the majority to Dubai Government related entities including Dubai World. Provisions are guided by the UAE Central Bank which is strict in demanding that non-performing loans be recognized according to international accounting standards. If such losses arise in the course of 2010 then it will be the accounts of this year that take the biggest hit. Nobody really knows how large total losses from the collapse of the Dubai property boom will prove to be, or the size of 'bilateral bank loans' and there are also non-performing loans in the northern emirates and Abu Dhabi as well. However, to talk as some of the popular local media likes to do of a quick recovery in the UAE banking sector is clearly very premature. The full extent of the problem facing the sector in 2010 has not even be finalized, let alone resolved. In the early 1980s, which government ministers have started to cite as a model for dealing with the current situation, several UAE banks went through hurried mergers and reorganizations as the true extent of bank finances became apparent. A similar local banking crisis in the aftermath of the recent real estate crash and global financial crisis therefore seems probable. Regards, Peter Cooper for The Daily Reckoning ALSO THIS WEEK in The Daily Reckoning... What People Want By David Walker New York, New York President Obama has to maneuver his way through a lot of constituencies, including Democratic senators and congress members, his own staff, and special-interest groups. Underneath it all, he may actually be a fiscal reformer. If he enacts major fiscal reforms, he will have one indispensable constituency on his side: public opinion. Ask the American people, and they will tell you overwhelmingly that our sustained fiscal health is fundamentally important. An Insider's View of the Real Estate Train Wreck, Part II By David Galland Right now there are an awful lot of banks that do an awful lot of commercial real estate lending, and for about a year now you've been telling me that you saw the first and second quarter of 2010 as being particularly risky for commercial real estate. Why this year, and what do you see happening with these loans and the banks holding them? The Topsoil Crisis By Chris Mayer Gaithersburg, Maryland "All life is a process of breaking down," the great F. Scott Fitzgerald once wrote. "But the blows that do the dramatic side of the work...don't show their effect all at once." These other blows you don't feel until it is too late to do anything. Fitzgerald was writing about his own famous crackup in the 1930s, but his comments also apply to the agricultural scene circa 2010. Government Bond Market Just a Ponzi Scheme By Puru Saxena Hong Kong, China Let's face it, the government-bond market in the West is a gigantic Ponzi scheme. Most governments in the 'developed' world are drowning in debt, they are running mind-boggling budget deficits and printing money like there is no tomorrow. Furthermore, under the guise of quantitative easing, their central banks are buying their own newly issued debt! Government Sachs By Bill Bonner Paris, France Last week, Greek Finance Minister George Papaconstantinou slipped. He said not what he should have said, nor what he wanted to say. Unwittingly, he said something that was true: his country's budget was "out of control." He begged for more time to straighten it out. "We're trying to change the course of the Titanic," he said. The EU ministers gave him a month. --------------------------------------------------------------- The Weekly Endnote: And that just about wraps it up for another week of reckoning. Thanks to all those who wrote in with their thoughts on the Obama budget, Chinese New Year and, of course, the typos we try to include every so often. Keep an eye out in future issues as we publish more and more of our readers' thoughts. And yes, do remember to get in on those First China Strike Pandas. They're walking out the door already and, as Joe mentioned above, "When they're gone, they're gone. They can't mint more." At the rate they're moving, looks like you'll probably have until Tuesday to grab a few. Other than that, enjoy your weekend. Until next time... Cheers, Joel Bowman Managing Editor, The Daily Reckoning   The Daily Reckoning - Special Reports: The US Trade Deficit: Fort Sumter...And The U.S. Trade Deficit US Recession: By far the Weakest Recovery "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.