Dubai Financial Meltdown to Trigger More Debt Defaults and Economic Contraction

[Crewleader]

Dec 01, 2009 - 09:18 AM

By: Mike_Whitney

The Dubai virus has been contained. There won't be another financial system meltdown. But the lessons of Dubai are hard to ignore. Global shares started tumbling at the first whiff of trouble; no one bothered waiting for the details. Someone yelled, "Fire" and the panic began. It's a good indication of how jittery investors still are.

Surprisingly, the dollar remained relatively flat throughout the crisis, hovering between $1.49 to $1.50 per euro. That's good news for the big banks and brokerage houses that are betting on the carry trade. If Dubai flops, the dollar will get stronger, and they'll lose a bundle. Market analysts predict that the zero-rate dollar is now funding over $1 trillion in one-way bets. It's a risky business which could lead to another disaster.

Dubai World's call for a debt moratorium triggered an immediate shift away from emerging markets which rely on cheap credit to fund their projects. Credit spreads have widened on countries throughout Eastern Europe and the developing world. Investors are skittish and want to see how much red ink is on business balance sheets. The possibility of a sovereign default is more likely now than ever before. Even if Dubai escapes the chopping block, others won't be so lucky.

http://www.marketoracle.co.uk/Article15469.html

[pscot]

1. Dubai's debt is 5 times GDP

It's ruled by a family of desert sheiks. Men outnumber women 3 to 1, because 70% of the population consists of low wage workers imported from India, Pakistan, Bangladesh and the Philippines. People probably think the sheiks are backed by oil riches, but their dwindling oil and gas reserves account for less than 6% of GDP. Most of their income comes from trade and tourism, but trade is down and tourists are put off by the noxious sludge of human was fouling the once pristine beaches. The question is not why the house of cards tumbled, but why it took so long.