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Econwatch

November 30, 2009 10:16 AM

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Text

Dubai's Serious, But Not Lethal

By: Jill Schlesinger
Topics: Financial Decoder

This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

I heard about Dubai's debt problems before dashing out for Thanksgiving and discounted the news. It seemed likely that Abu Dhabi, which sits atop a $700 billion sovereign wealth fund, would swoop in and come to the rescue. Not so fast - we would have to wait for the Tiger Woods car crash to move the Dubai story below the fold.

(AP Photo/Nakheel Development)

Here's the best way to think about the Dubai situation: it's as if you lent a bunch of money to your nutty friend "Ned" at the height of the housing boom (Dubai World, the investment arm of the Dubai government), who said that he wants to build a spec house. You figure that Ned's uncle (Abu Dhabi, which has 1/10 of the world's oil reserves) is worth zillions of dollars, so if the plan goes awry, Uncle will make you whole. But what if Ned's uncle wants to make the 50% crash in real estate values a teaching moment? What if he doesn't bail out Ned? What if the money you lent to another spendthrift friend is also at risk?

That's what happened last week - the fear Abu Dhabi would not repay bondholders of Dubai World, sent a wave of uncertainty through investors, just as they thought the worst of the crisis was over. Without the support of the rich uncle, global markets slumped, fearing that Dubai World's total outstanding debt of $59 billion dollars could also be at risk. Investors also worried about the spread to other emerging markets.

To restore calm in panicked international markets, Abu Dhabi officials finally intervened, establishing an emergency liquidity facility. However, by saying that it will "pick and choose" how to assist Dubai, some analysts believe that potential problems with write-offs may still exist, but for the moment, there was a big sigh of relief.

While there's no need to panic about Dubai, it was a harsh reminder of credit risks that may still lurk throughout the global system and that the nascent recovery is fragile and so too are investors' nerves.

More on MoneyWatch:
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•Why You Should Not Bash Cash

(CBS)

Jill Schlesinger is the Editor-at-Large for CBS MoneyWatch.com. Prior to the launch of MoneyWatch, she was the Chief Investment Officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.

Jill Schlesinger
>> View all articles
Jill Schlesinger, CFP®, is the Editor-at-Large for CBS MoneyWatch. She covers the economy, markets, investing or anything else with a dollar sign. Prior to the launch of MoneyWatch in 2009, Jill was the chief investment officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.
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10 Comments +

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by esaun211 November 30, 2009 12:19 PM EST

desert dwellers go b-rupt; how suprised would you be to know which US and Euro investments got ties to this blatant land ponzi. Better open ya eyes instead of IDing where one stays look around your own suburb or trailer park and you'll see same game

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by anti-global3 November 30, 2009 12:50 PM EST: actually the only U.S. based company that stands to lose big is bank of america. For whatever reason U.S. banks were not lending to Dubai world. THe Chinese, and U.K. did lend them tons though. While I don't have anything against the U.K. I think it is great anytime China gets burnt. All true Americans should want to see the Chinese economy revert back to 3rd world status. They have stolen and cheated just about everything they have. With the exception of Japan, Asian countries don't develop and invent new products or stratigies. They wait for others to do it and then steal them.


by Marc_1986 November 30, 2009 2:00 PM EST: @anti-global

"With the exception of Japan, Asian countries don't develop and invent new products or stratigies. They wait for others to do it and then steal them."

Spot on for the most part.

by anti-global3 November 30, 2009 12:01 PM EST

actually this will be good for the U.S. economy. All of the countries that were no longer willing to lend to the U.S. will now be doing an about face. In light of this and other middle eastern countries ready to crash lending to the U.S. will once again be considered a safe investment. This way we can negotiate lower interest rates. I am not saying it is good to keep borrowing but right now we have no choice.
Another plus is if alot of these countries go under that means less growing markets to buy China's manufactured goods. Anything thast hurts them is good for us. soon they may be begging to loan us more money.
Finally this will probably result in a stronger dollar and higher interest rates. If we can find a higher level where the dollar has spending power but low enough where we keep increasing our manufacturing base and exports we will end up much better off then most other countries.
In the end the U,S should come out on top once again.

Reply to this comment


by Marc_1986 November 30, 2009 1:59 PM EST: @anti-global

First off, your name seems to clash with what you're advocating in terms of "middle eastern countries lending to the U.S. will once again be considered a safe investment." That's another story though I guess.

Negotiate lower interest rates? We're already at levels unseen before, there isn't much lower we can go. We're already giving free money away by charging no or very little interest on Gov't loans.

Emerging markets have proven to be quite good for America recently. Because Americans over the past decade had been investing in emerging markets, this has led to an increased market share for the US, particularly in Eastern Europe, Central and South America. While US markets have rebounded, emerging markets have had an even stronger rebound than us, leading to profits for those who invested abroad, adn those at home who benefit from increased consumption of US produced goods. Granted the effect for us is not AS great as it is for China, but we definitely get a boost.

A stronger dollar and higher interest rates would follow from increased demand for US goods. How does defaulting and a loss of market share lead to increased demand?


by anti-global3 November 30, 2009 2:26 PM EST: I mentioned that I am not encouraging the idea we keep taking out loans, but in the short term unfortunately we need to.
When I said lower interest rates I meant what the U.S. will pay those lending us money. China is not lending the U.S. money at .05 or 1% interest, if they were they would be throwing away money. I am saying that when other investment opportunities go sour lending to the U.S. becomes more lucrative and we can negotiate better interest rates on the loans we take out.
Emerging markets can be good for the U.S. if we can manage to increase our exports and cut inot Chinas profits. I think the problem is the mentality that we in the U.S. owe it to other countries to help them grow and develop. Everytime we do that we are taking more revenue from the U.S. economy. Since we did nothing to create the squalid situations many live in in other countries we don't have any obligation to do other then what is in our best interest. Unfortunately I seem to be in the minority in my way of thinking. I always put the U.S. 1st, 2nd and 3rd.
Finally increaed demand would be good, but they key again is as foreign markets crash and burn there is less chioce in where to invest. It makes the U.S. dollar seem safer and therefore the wealthy around the world who have been dumping the dollar will now want to buy them again. That will lead to a stronger dollar, but as I said we don't want it to strong, because we want to increase exports as well. In other words we want it all, and we deserve it, we basically made the worlds economy what it was in the 90s and early 2000.

by quapawsix November 30, 2009 11:30 AM EST

Who cares if a bunch of rich desert dweller's are going Bankrupt.

Reply to this comment


by TerryMock December 1, 2009 8:25 AM EST: Will Civilization Get It Right, This Time?
SLDI Newsletter - July 2009 - http://www.sldi.org/newService/SLDIJuly2009.html

...stressing the general unsustainability of current land development practices all over the earth...the film HOME makes the point about the need for sustainable land development best practices by comparing the failed historical example of Easter Island to modern day monument-raising practices around the world, culminating in the tallest building in the world in Dubai. The point is that history shows us that civilization has reached its current lofty perch before, only to collapse because of fundamental flaws in our understanding of the true relationship between humans and nature.

This unprecedented technological ability to transfer knowledge around the world now sets the stage for a quantum leap in global consciousness that will hopefully allow our civilization to avoid repeating the mistakes of the past while moving forward towards a sustainable future.

Your participation and comments are welcome.

Terry Mock
Executive Director
Sustainable Land Development International - www.SLDI.org


by jd2408 November 30, 2009 11:22 AM EST: Sorry to tell you but I think most average Americans are smarter than your example. Unless Ned's uncle co-signed I would not "assume" anything. You do not what assume means don't you. Assume makes an ass out of u and me.; Reply to this comment