A year ago, the world reacted with astonishment as Iceland technically went bust. It seemed inconceivable that a modern democratic nation could have such parlous finances that only an emergency $6billion bail-out from the International Monetary Fund enabled its economy to keep functioning. This week, we witnessed a similar crisis in the Middle East but on a far, far more dangerous scale, as Dubai effectively defaulted on £48billion of loans. Unless its more prudent and oil-rich neighbour, Abu Dhabi, launches a rescue plan then Dubai - once a gilded monument to financial success - will effectively be insolvent. Read more: http://www.dail*****.co.uk/news/art...brink-financial-armageddon.html#ixzz0YBGL3CSn
Once again, its not the size of the default that matters. The problem lies in the fact that essentially unlimited amounts of CDS contracts were written insuring that debt. Thus do not look to the banks that had loans outstanding to Dubai, but w/the entites that wrote these CDS contracts and now will have to post huge amounts of collateral as their value rises. Its another example of our Ponzi finance system in which $60 or $80 (or whatever) billion amount of bonds or loans serves as the underlying asset for many multiples of that amount of derivative contracts.
Firstly, there's not that much CDS on Nakheel or Dubai out there, as far as I know. Apart from the fact that EM CDS is not that big of a mkt in the first place, the bonds are predominantly held by real-money investors. Secondly, the idea that countries like Russia, Turkey, Hungary and others should be painted with the same brush is somewhat ridiculous. Finally, the WSJ article makes a completely incorrect connection between the start of the Dubai troubles and the problems surrounding Greek debt. Aggressive widening in Greece sovereign CDS actually started well before the Dubai news came out. As usual, take everything journalists say with a healthy pinch of salt.
In case you weren't paying attention to the markets reaction on Friday it went something like this...."Oh Fuc....err...whatever." The market didn't particularly care and if the market doesn't care then why should we care? Dubai could fall into the Gulf and the world will move along just fine. This is a non event.
Given that the impact of this event is mostly on European banks, I believe fundamentally US will be fine. However, if the European banks are seeking help from their governments, the US dollar may appreciate. Given how US market is inversely correlated to the dollar, the market may see some temporary set back. I don't know how stable the banking system is in the UK, but if I have money in a UK bank, I would be concern about its exposure to this (either through syndicate loan or through a form of derivative), and may potentially pull my money out and put it in a Canadian bank.
Your take on it seems to be correct. Granted, I have a hard time understanding why more people aren't freaked out by this.