Dubai World is one of the largest borrowers in the world, at least relative to its home country. However, in a world of trillion dollar bailouts and healthcare plans, Dubai World’s problems are rather small on a global scale. In addition, it sounds like Abu Dhabi’s sovereign wealth fund – which has assets of over $400 billion – will likely extend a helping hand. Finally, there are real assets underlying the debt…and some of it is pretty spectacular, at that. Just Google Dubai images and see what you get.
Another bright spot, for U.S. investors at least, is that most of the U.S. banks were so busy manufacturing profits through the trading back and forth of sub-prime loans and credit default swap contracts that they somehow overlooked this opportunity to make some bad loans in Dubai. It appears, this time, that it is Citibank's traditional, slower moving European counterparts who will be restructuring their loan portfolios.
The Dubai shock reminds Wall Street that the de-leveraging process is not over as quickly as the markets would like. Bank Credit Analyst suggests that, “Treasury bonds, gold and the dollar could benefit from the mini market rout.” But BCA “does not expect that these negative shocks will derail the cyclical bull market in global risk assets.”
I am less of an optimist than BCA. There are reasons to be uber-cautious, but Dubai’s follies should not be given more weight than they’re worth..
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
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