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Dubai Confusion Shows Rogue Waves Are Still Out There

By Hans Parisis
Tuesday, 01 Dec 2009 09:03 AM More Posts by Hans Parisis

If you don’t understand very well what’s going on in Dubai, don’t worry; you aren’t an exception.

This morning, Sheikh Mohammed bin Rashid Al Maktoum, the ruler of Dubai, took questions about the fallout of Dubai World’s request for a standstill on its debts:

About international investors, he said: “They do not understand anything.”

So, finally, Dubai ruler media blackout has come to an end.

In the meantime, Moody’s, the ratings agency, which is supposed to “understand” the Dubai situation very well, this morning said the Dubai government and its related entities have debt of $100 billion, which is more than 100 percent of its current GDP and 25 percent higher than the current market estimate of that debt, which is around $80 billion.

The whole Dubai row started last Wednesday. Dubai World’s property company Nakheel asked for all three of its “sukuk,” the Islamic equivalent of the Western bond, worth $5.25 billion, to be suspended from trade. Tonight, a four-day holiday starts in the Middle East, which will suspend trading there in any case.

For investors, the Dubai debacle should be considered as a reminder there is still a long list of serious risks lurking in the global economy and capital markets.

Yes, it’s not just Dubai World alone. In the foreign exchange markets we have seen Switzerland and Russia intervening in the markets. After this morning’s emergency meeting at the Bank of Japan policy board, we can be confident that Japan is not far from foreign exchange intervention, once again.

Besides that, the European Union doesn’t know very well what it should do with Greece and Mexico, just downgraded to BBB. In Asia, Vietnam devalued its currency (the dong) and this morning raised further its interest rates in what we can call a classic beggar-thy-neighbor policy.

This brings back, at least to me, the not-so-very-pretty memories of the Thai baht devaluation in the middle of 1997, the beginning of the Asian meltdown that. And yes, also at that time, this raised fears of a worldwide economic meltdown due to financial contagion.

I’m not saying we face contagion this time around. Interestingly, that Asian crisis started in Thailand, which was not a big player at that time, with the collapse of its currency because the Thai government had decided to float the baht, thereby cutting its peg to the dollar after exhaustive efforts had failed to support it in the face of a severe financial overextension that was in part real-estate driven.

Then, as the crisis spread, most of Southeast Asia and even Japan saw slumping currencies, devalued stock markets, and other asset prices and a precipitous rise in private debt.

So, I still don’t know, and I’m surely not alone in wondering, how it is that China will fit into all this with its actual enormously undervalued currency, its bubble property market, its “anecdotal” record new auto sales even while overall gas consumption declines and banks are being forced to improve their unacceptable low capital ratios.

We’ll see. For now we have the problems in Dubai, Mexico’s downgrade, Russia and Switzerland’s and soon Japan’s exchange interventions and the generally considered unimportant Vietnam’s currency devaluation.

I don’t feel comfortable and certainly wouldn’t take risks now. Rogue waves are still out there, that’s for sure. I’m still patiently waiting for a correction. I’m not in a hurry.

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If you don’t understand very well what’s going on in Dubai, don’t worry; you aren’t an exception. This morning, Sheikh Mohammed bin Rashid Al Maktoum, the ruler of Dubai, took questions about the fallout of Dubai World’s request for a standstill on its debts: About...
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