Sense on Cents

Will the government of Dubai default on its debt? Will that trigger a wave of defaults in other nations or in selected companies? With Dubai situated in the oil-rich Middle East, how could this nation be on the precipice of default?

Thanks to kbdabear for sharing with us this unsettling story from The Times.co.uk, Dubai in Deep Water as Debt Crisis Spreads:

Fears of a dangerous new phase in the economic crisis swept around the globe yesterday as traders responded to the shock announcement that a debt-laden Dubai state corporation was unable to meet its interest bill.

Shares plunged, weak currencies were battered and more than £14 billion was wiped from the value of British banks on fears that they would be left nursing new losses.

Nervous traders transferred the focus of their anxieties from the risk of companies failing to the risk of nation states defaulting. Investors owed money by Mexico, Russia and Greece saw the price of insuring themselves against default rocket.

If Dubai were to default, it would be the first nation to default on its debt since Argentina in 2001. Whether Russia in 1998, Argentina in 2001, Dubai currently, or a number of countries in the future, the weight of unbearable debt forces default. The fact is, this overwhelming debt burden is not localized but truly global in nature. Situations like Dubai should not surprise us. In fact, I would be surprised if we do not witness more nations facing default.

What occurs beyond default? Typically, the devaluation of a nation’s currency which directly hits the citizens pocketbook and quality of life. From that point, there is often differing forms of civil unrest.

Global markets are reacting to this news out of Dubai. Our equity markets are expected to open approximately 2% lower. Interest rates are down 10 basis points in a flight to safety.

Will a default by Dubai be a temporary dislocation in the markets run to higher prices? Will it be a warning for “everybody out of the pool?” It is a clear signal that we live in a world filled with debt and risk. Sense on Cents will be monitoring this closely.

LD

This entry was posted on Friday, November 27th, 2009 at 8:29 AM and is filed under bankruptcies, Dubai, General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.