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We interrupt your regularly scheduled Thanksgiving
Dubai World won't repay its debt on time and the government of Dubai won't pick up the bag, raising doubts about its credibility. Who would bail out Dubai itself? Maybe it will be an "interesting" weekend:
Banking stocks tumbled on concern about their potential exposure to Dubai. Indeed, the cost of insuring against default by the emirate jumped, with Reuters reporting the Dubai five-year credit default swap being quoted as high as 500-550 basis points. This means it would cost about $500,000 a year to insure $10m of Dubai’s debt. On Tuesday it would have cost about $360,000.
Funds are surging into Germany and Japan, etc. For purposes of comparison, Dubai CDS contracts now cost more than for Iceland.
If you're feeling a little down today, and looking for something to be thankful for, be thankful you have not lent money to Dubai. Unless, of course, you have lent money to Dubai.
Posted by Tyler Cowen on November 26, 2009 at 08:43 AM in Current Affairs | Permalink
Comments
Any country, and investor, that builds indoor ski areas in the middle of the desert deserves no sympathy from anyone when they go broke:
http://www.skidubai.com/ski-dubai/resort
Also see:
http://en.wikipedia.org/wiki/Indoor_ski_slope
Happy Thanksgiving to you Tyler and Alex, and all the wonderful commenters on MR, my favorite blog for many reasons.
Posted by: anon at Nov 26, 2009 11:17:26 AM
Woot! Hope those UAE bastards have to return to the desert.
Posted by: DesiAvenger at Nov 26, 2009 11:31:25 AM
Er, how do you know if you (or a bank whose stock you own) has lent money to Dubai, or is on the hook for its CDS? Unless you have the resources to monitor that stuff full time, you probably don't.
Posted by: capitalistimperialistpig at Nov 26, 2009 11:50:24 AM
Er, how do you know if you (or a bank whose stock you own) has lent money to Dubai, or is on the hook for its CDS? Unless you have the resources to monitor that stuff full time, you probably don't.
Unless you have the resources to monitor that stuff full time (or are rich enough to hire someone trustworthy to do so for you, I suppose), you shouldn't be investing in individual banks (or stocks, for that matter). You should be investing in broad indices, which means that you lent at least some of your money to Dubai, but not all of it, and you'll be affected by it to the extent that your indices are.
Posted by: John Thacker at Nov 26, 2009 12:28:36 PM
Actually you should be out of stocks and stock indexes entirely right now as they are radically overpriced. ;-)
Posted by: Matthew at Nov 26, 2009 1:32:08 PM
Rumor has it that Hank Paulson has flown to Dubai with a two page draft legislation designed to help solve this problem. It is called Dubai Asset Relief Program, or DARP. The royal family, pubahs, and others will be shielded from the fallout, as the bad assets will sold to a bad bank, probably Citicorp. Ken Lewis, freed up from other duties, plans to be a bidder for the ice skating rink and ski lift.
Posted by: Bill at Nov 26, 2009 2:14:43 PM
Any country, and investor, that builds indoor ski areas in the middle of the desert deserves no sympathy from anyone when they go broke:
How do you know? Sure, operating an indoor ski resort in the middle of a desert has got to be expensive, but I'm assuming that the demand is high enough that they could get away with it. Did you check the company's financials?
Posted by: anon at Nov 26, 2009 2:38:07 PM
The Dubai government can't bail out Dubai World, because they are basically one and the same.
The Abu Dhabians will bail out Dubai, at a hefty price, and only after they've let them sweat a bit.
The Dubaians really thought that if nobody called it a house of cards, it wouldn't fall over in the slightest breeze.
Posted by: bartman at Nov 26, 2009 5:29:20 PM
Do I get this right: A partial, if major, owner of a derelict entity is expected by somebody in the financial press to put up more money when the entity tanks? Where do they live?
Happy Thanksgiving.
Posted by: Frank at Nov 26, 2009 8:15:57 PM
You should be investing in broad indices...
Yeah, Yeah, I know. Remind again how I wound up responsible for AIG's debt to the other big banks.
Posted by: capitalistimperialistpig at Nov 26, 2009 9:51:01 PM
Where is John B. Chilton on a day like today? I hope he didn't think he gets to go home for the holidays...
Posted by: rob at Nov 26, 2009 9:54:35 PM
Doesn't the UAE have a HUGE sovereign wealth fund? How does that play into this? Why can't they just dip into that to bail themselves out?
Posted by: Jake at Nov 26, 2009 10:18:23 PM
Watch this space: http://emirateseconomist.blogspot.com/
Posted by: rob at Nov 26, 2009 10:31:43 PM
There is nothing wrong with a ski resort in the desert, per se. If it were built underground with millions of used tires for insulation it might be fine. The problem is that we can't tell if it was a mistake or not.
Ppeople mistake good times for genius. Even if free money doesn't cause mistakes, it papers over them quite nicely. A resort shaped like a palm tree is a good idea in a certain reality. It is a reality that I can't imagine will exist going forward.
Posted by: Andrew at Nov 27, 2009 4:37:22 AM
Remember, John Chilton is physically resident in the UAE, thus he is unable to speak as frankly as he might about what's going on there, under threat of jail and deportation.
Posted by: Bartman at Nov 27, 2009 10:57:31 AM
anon @2:38:
You need to learn to read.
First anon @11:17 said nothing about demand, only about sympathy. anon expressed an opinion, did not state a fact.
And another anon agrees with Andrew. Nothing wrong per se if demand is there. And he's right that way too many people equate lots-o-money with brains (and, too often, moral worth.)
Bill, it is good to see you can inject humor into your comments. About time. It's OK to be partisan or whatever here, but follow Andrew's good example and try to be humorous about it. Or else please stick to serious discussion of economics. But no more hectoring. Please.
Posted by: another anon at Nov 27, 2009 12:05:58 PM
The World - Dubai
Wow
http://www.youtube.com/watch?v=7eUcRjo9Yv4
Posted by: anon at Nov 27, 2009 12:09:41 PM
I don't have any special insight. I sometimes wish I was still in the Emirates, though. Instead I'm living quietly in the U.S. and enjoying that, too.
I occasionally still post to my Emirates Economist blog. On the subject at hand I'll probably just be linking to Cowen, Krugman and others.
Posted by: John B. Chilton at Nov 27, 2009 3:45:26 PM
I am stunned that someone posted UAE should go down because they built an indoor ski slope in the middle of a desert. How lame is that?
Well, Dubai has effed up for sure, but who hasn't? The whole thing is that they are asking for a standstill agreement, the bondholders have to still ratify that, let's not forget about. It could be a negotiation tool. Afterall, the Arabs are born negotiators, what if the bondholders agree you get some breathing space why not use it.
The impact of this will be for a couple of weeks because this is a season of holidays do not forget once Dec 20 rolls in the markets start to close for Christmas and New Year.
I guess this is HH Sheikh Mohd teaching a lesson to his boys, he knew very well what impact it would have on the markets, someone would have had to blind and/or dumb to not predict this reaction and he ain't either. Bin Sulayem of Dubai World has been fired from the Board of Directors of Investment Corporation of Dubai, just like Mohamad Alabbar of Emaar and the Governor of DIFC (forgot the dude's name). There is some serious rejig happening at the top and this is a fallout of that.
Posted by: Venkatesh at Nov 27, 2009 4:35:33 PM
