The Debacle in Dubai

I was a guest on two shows, BBC News' "World News Today" and Fox Business News' "Cavuto," where I discussed the fallout from news that Dubai will delay repayments on $60 billion of debt from its investment company, Dubai World (videos embedded below).

As I see it, the turmoil that has occurred in global markets over the past 48 hours essentially confirms that investors in risky asset classes have not made allowances for surprises -- or even predictable events. In fact, it seems pretty clear that during the past nine months or so, many people have (again) come to believe they can achieve high returns with little or no risk.

Dubai's effective default also shines a light on another concern that economists, policymakers, and permabulls have largely pooh-poohed: the scale of and, especially recently, the rapid rise in public sector debt loads and the long, dark shadow these obligations cast over the economic and financial landscape.

Not surprisingly, as with the subprime crisis, clueless "strategists" are already suggesting that because of the sums involved (the ones we know about, at least) and the relatively small number of banks that are directly affected, the fallout will be limited -- remember the 2007 buzzword, "contained"? -- and that recent developments will be shrugged off. Yeah, right.

But in reality, the Dubai debacle underscores the fact that many consumer, corporate, and public sector balance sheets around the world remain impaired or overextended, despite -- or because of -- the rescues, bailouts, stimulus programs, and monetary easings that have occurred so far. In the end, this state of affairs represents a major barrier to any sort of meaningful recovery.

For those who are interested, here are the videos (also available at Vimeo):

BBC Interview with Michael J. Panzner (Nov. 27, 2009) from Michael Panzner on Vimeo.

FBN Interview with Michael J. Panzner (Nov. 27, 2009) from Michael Panzner on Vimeo.

Comments

[Blurtman]

Cavuto! Have you no shame?

Air China, China Eastern and COSCO defaulted on derivative contracts. These are China state owned enterprises and the defaulted amounts are said to have been in the billions. Oddly enough, the world’s financial markets did not come crumbling down. Nor are they crumbling down after the Dubai soft default. Nor would they have crumbled if US taxpayers did not back up the AIG derivative contracts. Geithner and Ben lied.

[buzzsaw99]

Losses to usa big banks are irrelevant as they are not even tallied. The fed buys all garbage at face value. It is a riskless environment for the banksters, otherwise C wouldn't have loaned Dubai $8B of bailout money. You think they're worried about it?

[MediaMentions]

and on the bright side we have this... http://www.pressdisplay.com/pressdisplay/showlink.aspx?bookmarkid=91MFUMJBISW&preview=article&linkid=d65ac9e1-f0c0-4846-a2fa-166dab7a6098&pdaffid=ZVFwBG5jk4Kvl9OaBJc5%2bg%3d%3d

Just trying to be positive.
MediaMentions

[Jr Deputy Accountant]

Michael, I can't believe I'm doing it but I'm going to have to disagree with you on this one.

You are correct that the problem is not solved and that balance sheets are just as (if not more) fragile than they were in 2007 and through all of 2008. We hear about "risk" now as if it is even tangible or measurable - who knows how much "risk" lurks beneath the surface and how much is already magically "counted out" of balance sheets thanks to whatever magical accounting has gotten us this far...

Dubai is a non-issue that is being made into an issue. Why? $60 billion? That's nothing. JP Morgan has $80 TRILLION in notional derivatives exposure, THAT is frightening. Citigroup losing $60 billion in Dubai? Pffft, that's not even 10% of a bailout.

I think there is something bigger and more sinister at work in Dubai and it has little to do with a potential default. Dubai has the assets to cover its debt - unlike AIG which was, of course, so exposed it may have taken a few of the big boys down with it. Dubai is a ruse.

Just my $0.02.

And yay at you making the teevee rounds :) Great job!

Adrienne