After Dubai

Restructuring of Dubai’s obligations implies that the creditors will take a share of the pain for the most distressed assets. Following this, we learned one hard lesson that never assume of an implicit government support and going by that, things had to get worse before they got better.

The risk from Dubai is not likely to systematically important on a global level, it is significant on a UAE and GCC level. They are a reminder that vulnerabilities and imbalances that contributed to the credit crunch have not disappeared. It clearly tells us that default risk of Dubai World may be only one of the risks that market actors were under-pricing. In particular, world’s attention now is shifted to the Eurozone and its periphery, where weaker countries like Greece and the more indebted of the Central and Eastern European countries, are under pressure.

UAE banks, which are already challenged by losses on mortgages as well as exposure to quasi-private companies that are undergoing restructuring, can access a new facility if needed as the size of exposures became clear and hopes of support from Abu Dhabi rose.

The bubble in Dubai can end in a number of ways – it can end in an economic collapse and general default as Dubai has done now or as Argentina did back in 2001. It also can end in massive hyperinflation, as with Latin America repeatedly in the 1950s through the 1980s and in the Weimar Republic of the 1920s.