The Dubai syndrome.

There’s an old saying that people with too much money on their hands soon find themselves with the opposite problem, and Dubai has just handed the world a prime example.

   Global financial markets were rocked Thursday by the stunning news that the Persian Gulf emirate’s sovereign wealth fund (SWF), Dubai World, is effectively insolvent and has arbitrarily declared a six-month moratorium on debt payments it’s unable to make.

    Global currencies from Colombia to Singapore took a tumble, and stock markets worldwide had a panic attack, fretting that some of the world’s other 30 or so SWFs might soon also be in dire straits.  Many SWFs have extensive debts outstanding with the world’s largest banks.  

    For all the worldwide efforts to bail out the global banking system, it has only returned to stability, not good health. Having endured the spectacular collapse of the U.S. housing market, the system is now girding for a string of defaults in commercial real estate. Additional failures among SWFs, unforeseen until last week, would not cause a second global credit freeze. But they would further delay a complete recovery of the banks and a sputtering world economy.

   What’s the origin of this latest disaster in world finance?...

 

...Full story in Sunday's Toronto Star.

 

 

Comments

[Darwin o'connor]

It's hard to believe that professional traders would think there is any connections between the many problems of Dabai and the many problems of Columbia.

[David Olive]

Hi Darwin: There really isn't a connection, of course, as that if oil-rich Dubai is at risk of defaulting, then as a holder of Colombian or Peruvian currency, you have to wonder if they too might default on supposedly safe government-issued bonds. The so-called Asian currency crisis of 1998, which soon circled the globe, began with, of all things, the Thai bhat. The decision by Bangkok to devalue the currency triggered a drop in most Pacific Rim currencies, then, inexplicably, a plunge in the Brazilian real, then the panic leapt over to Russia. Ground Zero is the mentality of currency traders in a few key places - the usual suspects of New York, London, Frankfurt, Tokyo. In trading all the world's currencies, often betting one against another, their sense that the Thai government move might be copied by other nations (it wasn't) prompted them to start dumping all currencies of developing world nations until the U.S. Fed and the IMF stepped in to restore order. You could observe as much about the relationship between Dubai sovereign debt and shares of Canadian Tire - there isn't one, but CTC slipped, along with the entire TSX, in Thursday trading on the Persian Gulf news, and in post- Thanksgiving trading Friday, the NYSE took a big dump. Traders are looking for any reason to buy and sell, something as obscure as an analyst's upbeat assessment of Ford Motor shares can trigger a strengthening in the U.S. dollar. Never mind the analyst might be wrong, and that it's merely one of 1,100 New York-traded stocks she's writing about, what the heck, this might be a sign that all of American manufacturing is poised for a recovery, so let's buy the greenback. Then they change their minds the next day, because of discourage crop-yield reports out of the Midwest - or Australia or Argentina. That's why it's impossible to "time" any market, to buy at precisely the most advantageous time. On a daily basis it's simply too unpredictable, volatile, and, as you point out, not grounded in rational or long-term thought. -DO