Dubai in Deep Water As Ripples From Debt Crisis Spread

Work has been halted on the artificial islands Fears of a dangerous new phase in the economic crisis swept around the globe yesterday as traders responded to the shock announcement that a debt-laden Dubai state corporation was unable to meet its interest bill.

Shares plunged, weak currencies were battered and more than £14 billion was wiped from the value of British banks on fears that they would be left nursing new losses.

Nervous traders transferred the focus of their anxieties from the risk of companies failing to the risk of nation states defaulting. Investors owed money by Mexico, Russia and Greece saw the price of insuring themselves against default rocket.

Although the scale of Dubai’s debts is comparatively modest at $80 billion (£48 billion), the uncertainty spooked the markets, with no one sure who its creditors are. Several banks rushed out statements to reassure investors that their exposure was small.

The FTSE 100 plunged by 171 points to 5,194 — its biggest one-day fall in eight months in one of the most jittery days in the financial markets since the depths of the banking crisis.

The Treasury, the Bank of England and the Financial Services Authority were monitoring events closely and are demanding figures from UK banks on their loan exposures to Dubai.

According to a senior government official, Dubai’s crisis is regarded as modest and manageable for Britain, but there were growing fears that Abu Dhabi, the oil-rich neighbouring emirate that has in the past given rescue loans, would leave Dubai to its fate.

Dubai World, the state-owned corporation that began the panic on Wednesday by demanding a standstill on its interest payments, worsened the mood...

Despite much of talk about markets “decoupling” from US or “change of leadership,” it’s just baseless talk. US is still leading in direction of the markets, though the velocity may differ with some other markets, i.e., some markets may be “hotter” over some period of time, and develop their own bubbles, but even when it’s regional bubbles, they seldom affect the rest of the world.

The rest of the world, including, in particular, China (which is developing financial and real estate bubbles of her own) are still too dependent on US economy and financial services that are mostly following US.

Which, of course, is no reason to gloat or be particularly happy about, but next time you hear about “decoupling” or some such, just smile and walk away.

But how much of that is inertia

Part of that is inertia, but even bigger part is that world doesn't have another leader ready or willing to step in to replace USA when she's floundering. For a while, there was a notion of Japan, Inc. potentially fitting that role, but everyone knows how that worked out. Then other smaller "tigers" as a group were looking hot, until 1998 Asian and Russian financial and currency meltdown.

No one really wants the role. EU likes to snipe from the sidelines and act superior, but they know where they would wind up without US leadership, and despite the "U" they are hardly ever united on anything, and viciously compete against each other - that does not a leadership make. Most of Europe has been hit harder than US by financial crisis.

China might in the not-so-near future assume the role of equal partner, but besides their own bubbles and internal issues (economy in most of the country is not the same we see in Shanghai, Shenzhen etc.) their own economy is just too dependent on US. Their current leadership is much smarter than our current leadership so they are gaining, but in economic terms they are worried more about us than we are. BTW, few realize that China had their own stimulus program at the end of last year, which relative to size of respective GDPs is four times larger than ours. But they are applying it much better, toward real infrastructure and some of that stimulus has been not in spending but in the form of targeted tax reductions.

No doubt that we are being subjected to the deliberate internal damage almost daily. It helps our friendly competitors and enemies alike, but, in terms of markets, there is simply no one at this time who could or would want to step in to take over leadership role. And everyone likes it that way, for now. How long it's going to last depends on how soon we can derail Obama-Pelosi-Clinton-Reid axis agenda.

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