Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Dubai Debt Default illustrates Financial Crisis Not Over

Interest-Rates / Credit Crisis 2009 Nov 29, 2009 - 07:20 PM GMT

By: Mike_Whitney

Interest-Rates

Best Financial Markets Analysis ArticleThe default in Dubai is not the beginning of Financial Meltdown 2. Don't look for dominoes here. Yes, it does raise serious questions about the vast debt-overhang in emerging economies--particularly East Europe. But, this is not a "sovereign default" in the strict sense, nor is there any great risk of contagion.


Oil-rich Abu Dhabi is loaded with liquid assets, possibly as much as $800 billion. They could pay off Dubai World's measly $60 billion debt without batting an eye. But Abu Dhabi wants to send its wastrel younger brother a wake-up-call by forcing Dubai to restructure its debt. That means that banks, bondholders and contractors will have to take a haircut, which is not surprising given the abysmal condition of the commercial real estate market.

Dubai World owners were caught up in the same heady debt-fueled commercial construction-binge that swept across the United States. The problem can be traced back to lax lending standards and low interest rates. Now demand has fallen off a cliff and credit is getting tighter. Dubai World can't roll over its debt or meet its obligations. That's what typically happens when credit bubbles burst.

On Thursday, Bank of America analysts issued a statement: “One cannot rule out — as a tail-risk — a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s.”

This is nonsense. There will be no sovereign default. Abu Dhabi is not going to send global markets into a nosedive to save a few billion dollars. B of A is blowing smoke. Oil has already slipped $3 per barrel since the crisis began. There will probably be a tentative resolution by the time the markets open on Monday. That doesn't mean that there aren't important lessons to be learned from this latest financial calamity. There are.

First, it illustrates that the financial crisis is not over---households, businesses and countries are still deleveraging. This ongoing process will slow spending and increase defaults, bankruptcies and foreclosures. Government guarantees and stimulus programs will not reverse prevailing trends. More incidents like Dubai World should be expected. These "credit events" will disrupt the recovery and spur greater risk-aversion which will push stocks downward.

Arnab Das of RGE Monitor sums it up like this: "We’re bound to see a rise in risk aversion. The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear. We still have to work out those balance sheet stresses. The recovery is proceeding, but significant challenges still lie ahead.” (Bloomberg News)

Second, when these incidents take place, there's likely to considerable collateral damage from the unregulated insurance policies (credit default swaps) which underwrite the bonds. These CDS derivatives are not sold on a public exchange so no one knows who holds them, in what amount, or whether the issuer has sufficient capital reserves to pay off claims. We should expect a repeat of AIG over and over again (although smaller) until the system is either regulated or CDS are banned. The bottom line, is that the current financial architecture is not designed to work; it is designed to make a handful of speculators very rich. These speculators own congress, the White House and the financial media, which is why there has been no meaningful change in regulations.

Dubai is not Argentina. There will be a resolution and contractors will get paid, although not "in full." There will be losses. Big losses. But no contagion.

News of Dubai's payment "standstill" roiled global markets where investor confidence was already thin. The dollar and yen strengthened and US Treasurys surged. The "flight to safety" is making it doubly hard for the Fed to reflate asset prices. Dubai-like credit events make investors jittery and they pull in their horns. That extends the slump and deepens the recession.

If the Dubai crisis drags on, the dollar will get stronger and the flourishing carry trade will crash. That means that the maxed-out banks (which are heavily invested in high-risk positions) will get clobbered once again. That's the nightmare scenario.

The Fed has wrapped its arms around the financial system and provided unlimited guarantees on trillions of dollars of dodgy collateral. But that might not be enough.

By Mike Whitney

Email: fergiewhitney@msn.com

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

Mike Whitney Archive

© 2005-2019 http://www.MarketOracle.co.uk - 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