FacebookTwitterGoogle+RedditEmail

Crisis in Dubai

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.

Dubai World owners were caught up in the same heady debt-fueled commercial construction-binge that swept across the United States. The problem can be traced back to lax lending standards and low interest rates. Now demand has fallen off a cliff and credit is getting tighter.   Dubai World can’t roll over its debt or meet its obligations. That’s what typically happens when credit bubbles bursts.

On Thursday, Bank of America analysts issued a statement:  “One cannot rule out — as a tail-risk — a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s.”

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 are.

First, it illustrates that the financial crisis is not over—households, businesses and countries are still deleveraging. This ongoing process will slow spending and increase defaults, bankruptcies and foreclosures. Government guarantees and stimulus programs will not reverse prevailing trends.  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.

Arnab Das of RGE Monitor sums it up like this: "We’re bound to see a rise in risk aversion.  The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear. We still have to work out those balance sheet stresses. The recovery is proceeding, but significant challenges still lie ahead.” (Bloomberg News)

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 regulations.

Dubai is not Argentina. There will be a resolution and contractors will get paid, although not "in full." There will be losses. Big losses. But no contagion.

News of Dubai’s payment "standstill" roiled global markets where investor confidence was already thin. The dollar and yen strengthened and US Treasuries surged. The "flight to safety" is making it doubly hard for the Fed to reflate asset prices. Dubai-like credit events make investors jittery and they pull in their horns. That extends the slump and deepens the recession.

If the Dubai crisis drags on, the dollar will get stronger and the flourishing carry trade will crash. That means that the maxed-out banks (which are heavily invested in high-risk positions) will get clobbered once again. That’s the nightmare scenario.

The Fed has wrapped its arms around the financial system and provided unlimited guarantees on trillions of dollars of dodgy collateral. Even so, that might not be enough.

This just in….

Monday update:

Nov. 30 (Bloomberg) — The United Arab Emirates’ central bank eased credit for lenders and said it “stands behind” the country’s local and foreign banks as they face losses from Dubai World’s possible default….. Banks will be able to borrow money from the regulator for half a percentage point above the three month local benchmark interest rate, the Abu Dhabi-based Central Bank of the U.A.E. said in an e-mailed statement yesterday.

“This is a timely pre-emptive move from the central bank," Ahmet Akarli,  an economist at Goldman Sachs Group Inc. in London said in a note to investors. The central bank is “ensuring that local markets are operational” and banks “have access to ample liquidity.” (Bloomberg)

Government-Sachs to the rescue, right on cue.

MIKE WHITNEY lives in Washington state. He can be reached at fergiewhitney@msn.com

More articles by:

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

Weekend Edition
January 19, 2018
Friday - Sunday
Paul Street
Dr. King’s Long Assassination
David Roediger
A House is Not a Hole: (Not) Caring about What Trump Says
George Burchett
How the CIA Tried to Bribe Wilfred Burchett
Mike Whitney
Trump’s Plan B for Syria: Occupation and Intimidation
Michael Hudson – Charles Goodhart
Could/Should Jubilee Debt Cancellations be Reintroduced Today?
Marshall Auerback – Franklin C. Spinney
Boss Tweet’s Generals Already Run the Show
Andrew Levine
Remember, Democrats are Awful Too
James Bovard
Why Ruby Ridge Still Matters
Wilfred Burchett
The Bug Offensive
Brian Cloughley
Now Trump Menaces Pakistan
Ron Jacobs
Whiteness and Working Folks
Jeffrey St. Clair
The Keeper of Crazy Beats: Charlie Haden and Music as a Force of Liberation
Robert Fantina
Palestine and Israeli Recognition
Jan Oberg
The New US Syria “Strategy”, a Recipe For Continued Disaster
ADRIAN KUZMINSKI
The Return of the Repressed
Mel Gurtov
Dubious Partnership: The US and Saudi Arabia
Robert Fisk
The Next Kurdish War Looms on the Horizon
Lawrence Davidson
Contextualizing Sexual Harassment
Jeff Berg
Approaching Day Zero
Karl Grossman
Disaster Island
Thomas S. Harrington
What Nerve! In Catalonia They are Once Again Trying to Swear in the Coalition that Won the Most Votes
Pepe Escobar
Rome: A Eulogy
Robert Hunziker
Will Aliens Save Humanity?
Jonah Raskin
“Can’t Put the Pot Genie Back in the Bottle”: An Interview with CAL NORML’s Dale Gieringer
Stepan Hobza
Beckett, Ionesco, and Trump
Joseph Natoli
The ‘Worlding’ of the Party-less
Julia Stein
The Myths of Housing Policy
George Ochenski
Zinke’s Purge at Interior
Christopher Brauchli
How Trump Killed the Asterisk
Rosemary Mason - Colin Todhunter
Corporate Monopolies Will Accelerate the Globalisation of Bad Food, Poor Health and Environmental Catastrophe
Michael J. Sainato
U.S Prisons Are Ending In-Person Visits, Cutting Down On Reading Books
Michael Barker
Blame Game: Carillion or Capitalism?
Binoy Kampmark
The War on Plastic
Cindy Sheehan – Rick Sterling
Peace Should Be Integral to the Women’s March
Kevin Zeese - Margaret Flowers
No Foreign Bases!
Matthew Stevenson
Into Africa: Across the Boer Heartland to Pretoria
Joe Emersberger
What’s Going On in Ecuador? An Interview With Wladimir Iza
Clark T. Scott
1918, 1968, 2018: From Debs to Trump
Cesar Chelala
Women Pay a Grievous Price in Congo’s Conflict
Michael Welton
Secondly
Robert Koehler
The Wisdom of Mass Salvation
Seth Sandronsky
Misreading Edu-Reform 
Ann Garrison
Full-Spectrum Arrogance: US Bases Span the Globe
Louis Proyect
Morality Tales on the American Malaise: the Films of Rick Alverson
David Yearsley
Winston and Paddington: Marianelli’s Musical Bears
FacebookTwitterGoogle+RedditEmail