Best of the Week
Most Popular
1. Crude Oil and Water: How Climate Change is Threatening our Two Most Precious Commodities - Richard_Mills
2.The Potential $54 Trillion Cost Of The Fed's Planned Interest Rate Increases - Dan_Amerman
3.Best Cash ISA Savings for Rising UK Interest Rates and High Inflation - March 2018 - Nadeem_Walayat
4.Fed Interest Hikes, US Dollar, and Gold - Zeal_LLC
5.What Happens Next after February’s Stock Market Selloff - Troy_Bombardia
6.The 'Beast from the East' UK Extreme Snow Weather - Sheffield Day 2 - N_Walayat
7.Currencies Will Be ‘Flushed Down the Toilet’ Triggering a ‘Mad Rush into Gold’ - MoneyMetals
8.Significant Decline In Stocks On The Cards! -Enda_Glynn
9.Land Rover Discovery Sport Extreme Driving "Beast from the East" Snow Weather Test - N_Walayat
10.SILVER Large Specualtors Net Short Position 15 Year Anniversary - Clive_Maund
Last 7 days
The War on the Post Office - 17th Mar 18
GDX Gold Mining Stocks Fundamentals - 16th Mar 18
Nationalism, Not the Russians, got Trump Elected - 16th Mar 18
Has Bitcoin Bought It? - 16th Mar 18
Crude Oil Price – Who Wants the Triangle? - 16th Mar 18
PayPal Cease Trading Crypto Currency Bitcoin Warning Email Sophisticated Fake Scam? - 16th Mar 18
EUR/USD – Something Old, Something New and… Something Blue - 16th Mar 18
DasCoin: A 5-Minute Guide to How It Works - 15th Mar 18
Stock Market Downward Pressure Mounting - 15th Mar 18
The Stock Market Trend is Your Friend ’til the Very End - 15th Mar 18
6 Easy Ways to Get What Women Want, for Less! - 15th Mar 18
This Isn’t Your Grandfather’s (1960s) Inflation Scare - 15th Mar 18
Eye Opening Stock Market Index, Volatility, Charts and Predictions - 15th Mar 18
Gold Cup At Cheltenham – Gold Is For Winners, Not For Gamblers - 15th Mar 18
Upcoming Turnaround in Gold - 14th Mar 18
Will the Stock Market Make Another Correction this Year? - 14th Mar 18
4 Ways To Writing An Interesting Education Research Paper - 14th Mar 18
China Toward Sustainable Economic Growth - 14th Mar 18
Stock Market Direction Is No Longer Important - 14th Mar 18
Trade Tariffs Defeat Globalists and Return Prosperity - 14th Mar 18
Stock Market Crash is Underway and Cannot be Stopped! - 14th Mar 18
Are Energy Sector Stocks Bottoming? - 14th Mar 18
Nasdaq Stocks Soars to New Record High After Strong Job Reports - 14th Mar 18
Bitcoin BTCUSD Elliott Wave View Calling for Rally toward $15,000 - 13th Mar 18
Hungary’s Gold Repatriation Adds To Growing Protest Against US Dollar Hegemony - 13th Mar 18
Record Low Volatility in Precious Metals and What it Means - 13th Mar 18
Tips for Writing and Assembling the Classification Essay - 13th Mar 18
Gerald Celente "If Rates go up too High, the Economy goes Down, End of Story" - 13th Mar 18
Stock Market Selloff Showed Gold Can Reduce Portfolio Risk  - 13th Mar 18
Silver Does it Again! Severe Consequences - 12th Mar 18
Has the Stock Market Rally Run Out of Steam? - 12th Mar 18
S&P 500 at 2,800 Again, Stock Market Breakout or Fakeout? - 12th Mar 18
The No.1 Energy Stock To Buy Right Now - 12th Mar 18
What Happens Next When Stock Market Investor Sentiment is Neutral - 12th Mar 18
Economic Pressures To Driving Gold and Silver Prices Higher Long-Term - 12th Mar 18
Labour Sheffield City Councils Secret Plan to Fell 50% of Street Trees Exposed! - 12th Mar 18
Stock Market Uptrend Resuming? - 11th Mar 18
Bond Market Interest Rate Yields Are Rising Again… Stocks Are on Thin Ice - 11th Mar 18
Death of Europe's Greenest City, Police State Sheffield Labour Council to Fell 50% of Street Trees - 11th Mar 18
Do All Bull Stocks Markets Need to Have a Bearish Divergence? - 11th Mar 18
An Inflation Indicator to Watch, Part 3 - 11th Mar 18
Online Stock Trading Tips - Tips about Online Trading & Day Trading - 11th Mar 18
NDX makes a new high. What does that mean? - 10th Mar 18
Blue Chip Companies on Track for $800 billion Buyback Record in 2018 - 10th Mar 18
Cheap Gold Stocks Basing - 10th Mar 18
An Introduction to Online Forex Trading - 10th Mar 18
Sheffield Police State as Tree Protesting Citizens Are Snatched off the Streets! - 9th Mar 18
Riding the Bitcoin Wave - 9th Mar 18
Are We in Late Cycle? Implications for Gold - 9th Mar 18
US Bond Market 3 Amigos Bottom Line - 9th Mar 18
The Stock Market Bubble Conversation - 9th Mar 18
The Last Great Myth of Every Financial Market Euphoria - 9th Mar 18
London Property Market Sees Brave Bet By Norway As Foxtons Profits Plunge - 8th Mar 18
Casino and Bingo - A Brief Statistics - 8th Mar 18
Stock Market Shrugs Off Trade War Fears, But Will It Go Higher? - 8th Mar 18
Gold Stocks & Silver Oversold but Not Gold Price - 8th Mar 18
Benefits of Using Same Day Loans In Emergencies - 8th Mar 18
Permanent Life Insurance: Is it a Waste of Money or a Valuable Investment? - 8th Mar 18

Market Oracle FREE Newsletter

Urgent Stock Market Message

Dubai Financial Meltdown to Trigger More Debt Defaults and Economic Contraction

Economics / Global Debt Crisis Dec 01, 2009 - 09:18 AM GMT

By: Mike_Whitney


Best Financial Markets Analysis ArticleThe Dubai virus has been contained. There won't be another financial system meltdown. But the lessons of Dubai are hard to ignore. Global shares started tumbling at the first whiff of trouble; no one bothered waiting for the details. Someone yelled, "Fire" and the panic began. It's a good indication of how jittery investors still are.

Surprisingly, the dollar remained relatively flat throughout the crisis, hovering between $1.49 to $1.50 per euro. That's good news for the big banks and brokerage houses that are betting on the carry trade. If Dubai flops, the dollar will get stronger, and they'll lose a bundle. Market analysts predict that the zero-rate dollar is now funding over $1 trillion in one-way bets. It's a risky business which could lead to another disaster.

Dubai World's call for a debt moratorium triggered an immediate shift away from emerging markets which rely on cheap credit to fund their projects. Credit spreads have widened on countries throughout Eastern Europe and the developing world. Investors are skittish and want to see how much red ink is on business balance sheets. The possibility of a sovereign default is more likely now than ever before. Even if Dubai escapes the chopping block, others won't be so lucky.

For now, risk-aversion is the name of the game. Even before Dubai blew up, 3-month T-Bills had slipped into negative territory while the 2 year Treasury fell to record lows. That means that investors aren't buying the "green shoots" hype. They've pulled their savings from money markets and stuffed it into government bonds, still the safest bet around. Here's a clip from the New York Times:

"Trying to prevent a run on its banks, and financial turmoil that some fear could spread globally, the United Arab Emirates said on Sunday that it would lend money to banks operating in Dubai, amid concerns about excessive borrowing around the world.

The central bank’s move was an attempt to head off the kind of crisis of confidence that froze credit markets last year and brought the global economy to the brink of failure, threatening everyone from hedge fund billionaires to retirees who had their savings in supposedly safe investments." ("Arab States Move to Stifle Dubai Crisis", Vikas Bajaj and Graham Bowley, New York Times)

The financial system is so fragile that a default on a paltry $60 billion can send the dominoes skittering through world markets. That sounds like a system on its last legs.

From the New York Times again:

"Central bankers and government officials around the world will be watching nervously for signs that the fears of contagion are contained or spreading as markets open in Europe and New York. They are looking to see if investors begin pulling money not just from companies and banks connected to Dubai, but also from other countries that may have taken on more debt than they can afford to repay.

Already, investors fled the stocks last week of banks with outstanding loans to the tiny emirate and its investment arm, Dubai World. Now, analysts will be watching to see whether investors flee highly indebted companies too.

While Dubai is not big enough to directly ignite financial repercussions outside the Mideast, the main fear is that investors could flee risky markets all at once in search of safer havens for their money — much as they did in September 2008, when the failure Lehman Brothers heightened worries about all financial institutions, regardless of their strength.

Those fears were allayed only after the United States announced a huge bank bailout, and began guaranteeing a variety of borrowing that slowly helped credit markets begin functioning again. That many of these measures remain in place could help contain any possible contagion from Dubai now."

The Times is full of it. The "fears were never allayed" because the system was never fixed. Instead of nationalizing underwater banks and forcefully reducing leverage in the financial sector, the Fed provided a blanket guarantee on all types of toxic garbage. That helped calm the markets, but the deeper problems still remain. There's been no new regulations and Wall Street's gigantic looting operation has continued without pause--only now--every-time a deadbeat developer misses a payment in some far-corner corner of the earth, all hell breaks loose. The way it's shaping up, central banks and finance ministers will be spending all their time putting out fires. That's because the so-called "new architecture" of the financial markets--including securitization and complex debt-instruments--doesn't work. We already know that, because the system collapsed. Remember?

Whether Dubai muddles through or not, there's more pain to come. The world's economies are now strung together with trillions of dollars of counterparty deals that are traded outside of any regulated index. No one knows who is sufficiently capitalized and who isn't. It's one big guessing game. On top of that, credit is tightening and rolling over debt is getting harder. That means more volatility, more uncertainty, and more Dubais ahead. No wonder public confidence in government is in the dumps.

By Mike Whitney


Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

Mike Whitney Archive

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules