Friday, November 27, 2009

Dubai: Lead Domino of the Next Round?

Last week, just in time for the inevitable information lockdown created by the Eid holiday, the United Arab Emirates requested that creditors of Dubai World, the state-owned investment company that essentially manages the UAE's investments and development projects, delay repayment of approximately $60 billion in debt coming due next month.  This comes after Sheikh Mohammed sacked, among many others, Dr. Omar bin Sulaiman from all his posts last Saturday and named Ahmed al-Tayer as the new governor of the Dubai International Financial Centre, signaling further retrenchment by the al-Maktoums by purging the Ivy League New Guard and replacing it with old, family allies.  This also comes after a $5 billion bond issue that had been represented as ear-marked for next month's debt payments but that is now obviously going to something the UAE considers more pressing, but what that something is remains a mystery.

But it doesn't stop there.  The bond prices of course tanked, and the spread on insuring Dubai debt shot past Icelandic levels as the threat of sovereign default became a real player at the table.  Then there is the effect on the $123 billion in debt held by foreign banks.  $50 billion is held by UK banks, notably HSBC, Standard Chartered, Barclays, and RBS, but there is plenty to go around.  BNP Paribas holds about $1.7 billion, Citigroup $1.9 billion, and Goldman Sachs a mere $600 million.  Any bets on how fast this ends up on the books of US and UK taxpayers?

And this morning I read something really disturbing.  It's an open question how much Dubai's problems will spread throughout the Gulf.  The spreads for Bahrain, Abu Dhabi, and Qatar have jumped appreciably.  But when asked about the growing cost of finance in the Gulf, a spokesman for Munich Re said, "As for whether the cost of insuring debt in the Gulf will soar it is too early to judge the situation."

Wait a minute, isn't it your job to judge these situations?  And if the reinsurers aren't making these "judgments," what exactly is the current market in hedging instruments based on other than balloon juice?  Two years into this train wreck, and we haven't learned a thing.

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At November 28, 2009 at 7:15 AM, Blogger Nando said...

Knute, I'm not telling you anything you don't already know. This comment is for anyone who finds this site.

Isn't this one great indictment of a debt-based, worldwide economic structure? Money is a zero-sum game. We see that many nations and multinational corporations have puffed up their financial strength for quite some time. Now, when it is time to make a payment on their debts and liabilities, many of them cannot make it.

And I agree with your assessment: much of this will be "forgiven" or absorbed by British and U.S. taxpayers. How I wish young people in the U.S. understood this great fraud.

At December 12, 2009 at 11:05 AM, Blogger Knute Rife said...

Debt per se is not an evil, but our entire system is built to fail at the two tasks it's supposed to perform: debt creation and debt management.

As I have said on numerous occasions in numerous places, a real economy produces real things. If you create and manage debt in order to produce real things, that can be good. If on the other hand your economy produces paper and electrons, you have a fake economy, and it will eventually be found out. If you are creating debt to create paper and electrons which in turn are just more paper and electrons which are just more debt, how is this not a house of cards waiting to collapse?

Every great power that tried to buy everything it needed instead of producing it itself (Rome, Byzantine Empire, Spain, France, Britain) has wrecked itself with that policy. The US is in no different position.

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At January 7, 2010 at 9:21 PM, Blogger Knute Rife said...

@хостинг (That's "hosting", for the Cyrillically challenged.),

30 years ago when I was actively engaged in such things, I could have read this. Today, not so much.

At February 17, 2010 at 4:18 PM, Blogger kanishk said...

We see that many nations and multinational corporations have puffed up their financial strength for quite some time

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