The National has an article describing the various options to be offered creditors of Dubai World which contains some real howlers:
Creditors will be offered "new debt".
While I'll admit this is conventional "banker speak", a rescheduled loan is about as new as that recycled left over on your dinner table. It's the same old debt in a slightly different package.. It's like the dinner from Saturday that you quite didn't finish that turns up on your plate on Sunday. It's not a new meal even if your wife has added Hamburger Helper. A new loan would be a voluntary extension of credit. Trapped money is the financial equivalent of a leftover.
But the real gem is the following.
“Receiving 100 per cent of the principal and zero per cent interest is better than taking a 30 to 40 per cent haircut. On this basis, the banks involved will not have to incur a loss other than the time value of money which is not insignificant but may be better than the alternative,” said Jawad Ali, the managing partner of the Middle East offices of the law firm of King and Spalding.
If you get back less money from a debtor than you advanced after taking into consideration the time value of money, it's a haircut. A loss is a loss. Pretending it is something else makes as much sense as saying that Dubai World wanted to help banks have solid earning assets on their books so its extending the maturities on its loans to help them out.
As I pointed out in an earlier post, equal amortization of a loan over five years at a 5% interest rate is equivalent to a 13% haircut and at 10% a 24% haircut if one were being paid back immediately.
Also as I noted, reputable firms of accountants working in reasonably developed markets would apply IFRS (or US GAAP) and require a bank to recognize an impairment against the asset. And guess what, the loan would be written down using present value techniques - which recognize the time value of money.
However, in this matter I will defer to learned counsel's assessment of the firms and markets he practices in. Financial institutions from developed countries will see right through this transparent scenario.
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4 comments:
Nice article.
PARA 3: If you get back less money from a creditor .......
Surely you mean debtor!!
Thanks for the catch.
It's slips like this that may raise doubts about the thinking process at work on this blog.
Very intresting... This might be a very stupid observation, but ill throw it out there.
Time value of money is a golden standard in traditional banking. I give you a loan, I want my intrest to cover time value of money.
But lets say im a highly idealistic islamic banker with a loan to DW... how would islamic banking theory hold up?
I loan you money, I get back my loss / return... Tvm is not incorporated per say... But T-bill , Libor / Eibor rates are somewhere in the calculations...
Still a bad deal for the islamic bank, but i wonder if there is a bright side to it?
For an Islamic Bank the path is pretty clear.
First, there's Sura Al Baqarah Ayat 280 which deals precisely with what is to be done if a debtor has problems.
Second, there are many verses in the Qur'an which make it crystal clear that "wealth and sons" pale in comparison with the rewards that await those who follow God's teaching.
Clearly, the Islamic Bank would have no problem giving an extension. And following the recommendation in the Qur'an should forgive the unpayable amount of the loan.
That is I suspect how we will be able to distinguish the Islamic Banks from the "Islamic" Banks who lend to DW.
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