by Mike Whitney
The 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.
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
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.
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
There will be losses. Big losses. But no
But that might not be enough.