During the 6th century, the people of Athens fell into troubled times. First, on account of poor harvest and then from pestilence, as farmers were unable to make interest payments on their debts. As a consequence, they were sold as serfs into slavery.
As the debt situation slipped further out of control, desperate Athenians called Salon into public office and gave him full powers. The atmosphere in which he took power was not much different from the manic-depressive times we know today. Of course, Salon’s first act was to redeem all forfeited land and free the enslaved citizens.
This he did by fiat; which is to say that he legislated immediate default. The Athenians called it “the shaking off of burdens”, but in his own words he had “uprooted the mortgage stones that everywhere were planted”.
Today, we cannot escape the virtues of Athens, which became the foundation of Western civilization, all unleashed by the decree to default on debts.
A repeat is what’s needed now
In today’s economies, such decrees by fiat are not as simple. However, short of these radical reforms, what is needed is a moratorium om debt repayments, both interest and principal, for the SME sector for periods of between 12 to 18 months. This would allow for an orderly restructuring of businesses and a reallocation of capital towards productive enterprises.
The current holiday period of 2-3 months is simply insufficient, and is paving the way for mass defaults. In any case, this is what banks are supposed to be avoiding - presumably when bankers could exercise their acumen before the tyranny of compliance departments took over any rational decision making. A recent survey conducted by the Dubai Chamber confirms this rather grim outlook, with more than 70 per cent of small and mid-sized businesses expecting to close down in the next six months.
Only an incremental replacement
Given the structure of Dubai’s economy, this exodus would only be replaced slowly, sucking away the demand engine that has been built over the last three decades. To be sure, debt holidays are not uncommon. The history of railroads has been built on the foundation of default, as has been the more recent laying of telecom cable across the world.
The point is that default can be avoided, as banks start to take a proactive approach, under the watchful eye of the UAE Central Bank. The world economy was shut down by fiat. Extended debt moratoriums similarly need to be put in place by fiat, allowing businesses to move away from the battle for everyday survival, which most will lose given the current trajectory.
Make it gather speed
The point of any stimulus is to get the money velocity to rise. In America, the Federal Reserve is moving beyond buying fixed income securities and lending directly to small businesses. Similar moves may or may not be available in the UAE, but at the very least, extended debt relief, alongside immigration reforms allows for domestic liquidity circulation to start, rather than the current atmosphere, which is replete with palpable anxiety and angst-ridden about inevitable closure and wealth destruction. Will banks come to the party? How will they be able to distinguish the good from the bad? This is the job of bankers, a task they have admirably fulfilled throughout millennia, before compliance ushered in the era of rigor mortis as far as lending decision making was concerned.
Bankers need to shake off the burdens of compliance if they are to be able to infuse liquidity and confidence to struggling entrepreneurs, across sectors, especially the worst-hit ones of hospitality and real estate.
More than 2600 years ago, Salon showed what astute leadership was all about, and what needed to be done in order to make the city of Athens great again. In the modern day world, its all about getting people to show up.
The private sector has always been remarkably adept at innovating and creating demand. The role of the government now more than even through its social contract is to facilitate that process.
As country after country grapples with its own set of policy measures, this is the time for Dubai Inc. to lead the way in pivoting towards the needs of the private sector, and give them the tools to rebuild in a practical manner. Only by “uprooting the mortgage stones” can the process of recovery take hold.
- Sameer Lakhani is Managing Director of Global Capital Partners.