Wednesday, November 25, 2009

Dubai Default?

As this NYT news shows, possibility of Dubai Default is no more a fiction but actual reality. It is true that Dubai provincial government is only asking for 6 month reprieve in debt repayment and Dubai government is no UAE sovereign government. It is not a sovereign default and Abu Dhabi, the governing entity of UAE is not involved. Rather Dubai default is happening because Abu Dhabi is refusing to back all sorts of crazy investments of Dubai at full tilt.

Nevertheless, defaults involving governments always start by 'stop payment for few months' and so on. Though payment restructuring request from Dubai has been expected for a while and in that sense this news is not a surprise; what this news proves is that all those conservative investment gurus who have been pounding the table for long might be correct. Unbridled growth financed by boat load of borrowed money, without channelling to right 'productive means'; on most occasions end bad. Dubai is no exception.

This means fears of sovereign defaults by Yen, Pound and Dollar are not totally misplaced. One only wishes this news does not give a 'fit' to global financial markets and push the fragile global recovery back into the dreaded 'double dip'. That is something to watch for this week among Asian Markets while Americans are taking the Thanksgiving off.

On a practical level, this development has yet another consequence too. Asian economies need to develop deep 'debt markets' to go away from the reliance on American debt market (and hence American / Fed debt). With Dubai fiasco, chances of 'deep non-American debt markets' get pushed aside. As a result over reliance on Fed and American Debt market continues and over dependence of the world on Dollar does not get stemmed. More pilling of American debt as a result hardly removes the fear of Dollar/ American Sovereign default.

We still don't get out of the hole in which we all are.

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