When the credit crunch first hit Western Europe and America, many of my banker friends rushed to the Middle East, particularly Dubai, to pretty much the only area that was still doing any debt-related business.
It turns out that all that glimmers is not gold, and even that debt bubble looks like its burst now in the latest black swan. Dubai declared that it will be freezing repayments for at least 6 months on part of its approx $90 billion or so of visible debt at the state run Dubai World company ($20 billion). The ratings agencies responded by cutting the ratings on Dubai bonds to junk status. As the Dubai property crash begins to correct a 6 year property boom, serious doubts about debt repayments are being raised.
It won’t be the first economy severely affected by an over-leveraged property sector (Iceland being a key example from 2008) but the fact that it has happened so much later than the other major economies (which had recently shown signs of a nascent recovery), thoughts of a “W” recession are back on the agenda. Incidentally, looking at the credit default swap risk prices on sovereign debt, Venezuela is at the top of the list,with Greece quite close (France and Germany are ostensibly the safer ones).
The next question (on Monday morning by all accounts) will be how much contagion there will be from this news… I expect to see some of my friends back in London sooner than I expected!
(Update: Abu Dhabi stock market fell 7% upon opening on Monday morning; Dubai’s market fell 5.9%)
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