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Will Dubai Default?

Posted by Larry Doyle on November 27, 2009 8:29 AM |

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

  • whoisjohngalt

    Larry, the most important word in the following is commercial.

    http://www.breitbart.com/article.php?id=CNG.15417e8f63a995484187728fd215d360.b71&show_article=1

    ———————–
    “Our intervention in Dubai World was carefully planned and reflects its specific financial position,” Sheikh Ahmed bin Saeed al-Maktoum said in a statement.

    “The government is spearheading the restructuring of this commercial operation in the full knowledge of how the markets would react. We understand the concerns of the market and the creditors in particular.”
    ———————-
    Could this be another nationalization ploy? Venezuela and Russia have pulled these tricks before.

    http://money.cnn.com/magazines/fortune/fortune_archive/2007/02/05/8399125/index.htm

    Are the enemies of the west going to use financial tricks and nationalization to rob us. I think so. What do you think?

    • Larry Doyle

      I think you are very much spot on with your assessment. In fact, we have been witnessing a fair amount of this nationalization right here at home, so the continued shift away from capitalism toward socialist measures continues. The idea that in order to support or protect the market, nations need to subvert – if not outright violate market-based principles – is truly perverse.

      We should not think that the bill that must be paid is foregone merely postponed. In the process, the concept of free-market principles is forever changed and that cost is unknown but not insignificant.

  • sergio

    As long as every government in the world, including our own is playing a huge game with billions of dollars ,than why should I not play the same game and default on all my debts?I will also default on my credit cards and all other non-secured debt I have. When the leaders of my nation and other nations,when the leaders of the banking and lending world behave like responsible citizens, I will then respond in kind and behave accordingly.

    • Larry Doyle

      Sergio,

      I understand your thought process and realize that many share it. However, you also need to appreciate that the consequences of defaulting are likely far different for individuals than for corporations or sovereign entities. I appreciate that you may be speaking in rhetorical fashion. I think the lesson is to minimize debt as much as possible in the first place. If only nations took the same approach as we all collectively pick up that tab.

  • Tony Ryals

    Remember Larry why I was so concerned about His Highness Sheikh Mohammed Bin Rashid Al Maktoum having 26% of the NASDAQ and why I thought you and every person involved with ‘securities’ and concerned for America and American investors should warn about His Highness Sheikh Mohammed Bin Rashid Al Maktoum control of the NASDAQ ? Also note that
    no Israelis screamed about his ownership like they would if Iran’s Amadenajad owned it. I wonder why ? I also note that ICTS International that ‘guarded’ Logan Aiport Boston on 9/11 and bought Huntleigh airport rent-a-guards with some of the money they scammed from Americans on the NASDAQ in 1999 and were delisted on the NASDAQ in 2006,(pre His Highness Sheikh Mohammed Bin Rashid Al Maktoum investment in NASDAQ),are proudly displayed on His Highness Sheikh Mohammed Bin Rashid Al Maktoum’s new post Bernie Madoff NASDAQ ? I wonder why he likes those Israelis who guarded Logan on 911 so much and if his Dubai banking systems’ wiring of over a $100,000 to Mohamed Atta by Khalid Sheikh Mohammed was really an accident ?






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