Friday, November 27, 2009

Come nigh Dubai 

I was looking at my cellphone between Thanksgiving dinner and dessert and saw the news on Dubai. So far it doesn't seem like that big a deal; while the U.S. market dropped a good 1.5% at the open, remember that most traders are out of town for the weekend already, and after the British market lost more than 3% yesterday it appears to be steadying today. So far Paul Krugman's analysis appears to be right: Dubai is a rather curious place, and the damage may be limited to Abu Dhabi and some banks overseas. U.S. banks, for instance, don't seem to be falling any more than the Dow generally, though British banks were being knocked down 5% or more.

My flashback was to August 1998, when I boarded a plane from Cairo back to the States, and as I took the International Herald Tribune from the flight attendant I saw the news of Russia's default on its bonds. That took a little time to sweep through markets; it was three weeks later that Russia floated the ruble. So while we may not want to believe the doom and gloom crowd, I think we should pay more attention to this than one might on a holiday weekend.

Gillian Tett puts it in some perspective, including the Greek story with it (I wrote about Greece earlier this week) as "a welcome wake-up call":
After all, [investors] have known for months that Dubai World was dangerously over-leveraged. They assumed that this would not be too dangerous, because they thought that foreign investors would always be protected.
"Seabee" at Dubai World expands:
For nearly a year the Dubai World companies have been going through a 'restructuring'. But it's always a nonsense for the management responsible for a company's troubles to be allowed to create and preside over a restructuring made necessary because of their own policies. A Chief Restructuring Officer, an outside expert with a proven track record, was needed from the beginning of the crisis to sort the mess out. But it wasn't treated with the urgency the situation demanded.

They became bloated companies with unnecessarily huge numbers of people being paid huge amounts of money, huge duplication of job functions between the companies in the group, unnecessary competition to build the biggest, tallest.

That led to too many mega-projects all going ahead at the same time. Worse, many were pushing engineering into uncharted waters but second and third versions were being pushed ahead before the engineers had worked out how to make the first one.

...We're a year into the crisis before the real moves are made that needed to be made there and then.
Does this sound familiar to you?

Mohammed El-Erian of Pimco: "There will be contagion to many markets, especially in the emerging world where we are witnessing broad-based sell-offs among names with very different financial characteristics."