Lessons From A Dubai Default

MI-AU028_DUBAI_D_20081215181700By Greg Hunter’s USAWatchdog.com

Last week, just before the Thanksgiving holiday, Dubai World asked creditors if it could suspend payments on nearly $60 billion in debt.  Experts call this a “technical default” by Dubai itself because it owns Dubai World which is a state run investment company. 

Imagine calling your banker and telling him that you are not going to make your mortgage payment for at least 6 months; that would also be considered a technical default.  The folks defaulting on their debt are famous for building the man-made palm tree shaped island in the Persian Gulf.  Ya think maybe they over did it?    

 Now, according to Reuters, there may be some sort of bailout by the U.A.E central bank.  “The United Arab Emirates‘ central bank set up an emergency facility on Sunday to support bank liquidity in the first policy response to Dubai‘s debt woes that threatened to paralyze lending and derail economic recovery.”  (Click here for the complete Reuters story.)     

Problem solved, right?  Not by a long shot, according to banking analyst Dick Bove.  The problem is the financial system is murky.   You have things like derivatives, credit default swaps and off balance sheet accounting that make it hard for banks to tell how   much they might lose on bad Dubai debt.  Bove said in an online CNN story, “There could be huge indirect exposure,” he said. “One has to assume that U.S. banks will be hurt.”  (Click here for the complete CNN story.)   

It is not just American banks that might take a hit, but also some European Banks will probably be forced to take some big losses.  We won’t know how the Dubai financial crisis will work out for weeks or maybe months.  Dubai has $12 billion in debt coming due before the end of 2009 and plenty more debt due in 2010.    

So where are the lessons here concerning the Dubai debt default?  Two things come to mind.  If you thought that the financial crisis was ending, then Dubai is a reminder that the crisis is growing not shrinking.  I wrote about the U.S banking troubles last week in a post called the “FDIC Is Way Beyond Broke.”   This new Dubai default could not come at a more inopportune time, especially for U.S. banks.    

Also, this is a worldwide banking crisis that will require a worldwide solution. That solution seems to be the same on every continent.  Dubai will likely print money and let nothing collapse just like everyone else.  By the way, The U.S. Mint suspended the sales of Gold and Silver Eagle coins on the same day Dubai announced its “technical default.”  That probably is a coincidence but, then again, if you have a banking crisis, do you want people taking money out of the system and buying precious metals?    

The Dubai crisis is a sign that the global financial meltdown that began in 2007 is just picking up steam, and it will get a whole lot worse before it gets better.

Comments
  1. Chris

    Well said and right on target as always. I think that we’re just going to see wing after wing being built on to this global house of cards until it comes tumbling down.

    • Greg

      Chris,
      Thanks for the support!
      Greg

  2. DaveInLV

    Somehow I get this irrational feeling that ultimately it is the American public who will end up bailing Dubai out.

    • Greg

      DaveInLV,
      Me too. Thank you for taking the time to comment.
      Greg

  3. Todd

    Yes you’re quite right, this whole thing is just picking up speed. Well I hope that the astute readers of this and other columns have shielded themselves with an aegis of precious metals. Years ago, I used to scoff at the end-of-the-roaders, but today, not so much.

    I really think this whole collapse is being engineered. But I think that the model is Argentina, rather than Zimbabwe. I think the idea is to destroy dollar hegemony and move on to a “brave new [post-dollar] world,” whatever that will be.

    Short-term, I wouldn’t be the LEAST bit surprised to see some sort of bank holiday(s) official dollar devaluation once or twice on our road to perdition here. But rest assured, there’s no pulling back from the precipice at this point — no way. The continuum I’m imagining runs from “really really bad” to “pretty much catastrophic”.

    But I doubt if heads will roll! I think Americans will be too involved keeping body and soul together to worry about what punishment is meted out to whom. We’re in for a real nor’wester.

    • Greg

      Todd,
      Something big is going on that is for sure. I think all the signs are there that this crisis is getting worse. I hope people take the steps to protect themselves. Thank you for your comment and insight!
      Greg

  4. Marshall

    Uhh, buying gold takes nothing out of the banking system. The person or organization that sells the gold gets dollars for it, and the person buying it gives dollars for it. The seller deposits the money, the purchaser withdraws the money. For the banking system it is 0 gain/loss game. It is no different than buying any other commodity.

    Marshall

    • Greg

      Marshal,
      I disagree because the gold seller does not turn around and deposit the money. The coin store, for example, will take the money and pay salaries, expenses, take profit and buy more products to sell. The buyer will take the money out of a bank and therefore the bank will no longer have it to loan out. So buying precious metals is not a zero sum game. Thank you for your comment.
      Greg

  5. Tom Paine

    This is just another example of what has been dubbed the “sky scraper indicator.” That is, every time a new world’s tallest building is built, it is fairly quickly followed by a financial meltdown in the building country.

    Thanks for not being another cheer leader.

    • Greg

      Tom,
      Good comment…I did not know that!
      Greg

  6. Eric

    Hi Greg,
    so far people in charge were and are able to maintain the financial system going, and this can go on, theoratically for ever. However in practice this is not the case in your view what are the most likely events in order of posibilities (this of any kind of events)or signs of events that could or would trigger a meltdown

    Regards
    Eric Zurcher

    • Greg

      Eric,
      Someday soon this will pop. I hope you are ready for it. Thank you for the comment!!
      Greg

  7. UncoolSam

    @Todd

    You said, “brave new [post-dollar] world,” whatever that will be.

    I believe it is the new ‘Amero’. This will replace the collapsing dollar once Mexico, USA and Canada are merged into a supernation.

    Just watch the first 20 seconds of this video and notice how USA/Mexico/Canada is all the SAME colour (1 country !!!).
    http://news.sky.com/skynews/Home/Wor…vonne_Fletcher

    All 3 countries will become NAFTA (North American Free Trade Agreement).

    Notice how all of the other nations are merged into supernations !!

    • Greg

      UncoolSam,
      People like gold expert Jim Sinclair say we will not go to another fiat currency but to some sort of gold or commodity backed currency. The BRIC countries are talking about a Super Sovereign currency backed by gold, oil and other commodities, as a competitor to the dollar. If there is an Amero it will probably be backed by something. Sinclair thinks the U.S. dollar will have to be backed by gold someday. I guess we will have to wait and see. Thank you for your comment and the video!!!
      Greg

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