|"Only dull people are brilliant at breakfast"
|"The liberal soul shall be made fat, and he that watereth, shall be watered also himself."
-- Proverbs 11:25
On Wednesday, Dubai requested that Dubai World be allowed to skip six months of interest payments on its debt. Before then, Dubai World, the corporate face of the emirate, had commissioned the city state’s flashiest buildings, managed ports around the world and reached far overseas to invest in properties like Barneys in New York.
Now, just as Bear Stearns was a harbinger of a string of failures of overly leveraged investment banks, the concern is that Dubai could be the canary in the coal mine for heavily indebted countries. The debts of everyone, including Japan and the United States, not to mention emerging markets, have risen greatly as the countries have fought the ravages of the global recession.
“You can print as much money as you want, but at the end of the day you have to pay the interest on your debt,” Mr. Tepper said.
Dubai is one of the few member states of the United Arab Emirates that has little oil wealth of its own. It acts as the trading, tourist and financial hub of the emirates. But it was assumed that the U.A.E.’s richest oil state, Abu Dhabi, would always bail out its free-spending neighbor.
Dubai’s announcement on Wednesday reversed that presumption — even as investors fretted that Dubai risked a sovereign default that would ripple to developing nations.
And while Abu Dhabi may well want to make its more exuberant neighbor and its bankers suffer a bit for their profligate ways before it rides to the rescue, that gives little comfort to investors already wary of the region’s growing debt.
While no one is expecting an outright default as long as global interest rates remain low — largely due to aggressive government bond purchases by central banks — concerns have been building for months that once these easing measures end, interest rates will spike and investors will become less willing to trust the word of heavily indebted governments.
Labels: economic death watch