The World doesn't like it when rich people can't pay their debts:
DUBAI, United Arab Emirates - Just a year after the global downturn derailed Dubai's explosive growth, the city is now so swamped in debt that it's asking for a six-month reprieve on paying its bills — causing a drop on world markets Thursday and raising questions about Dubai's reputation as a magnet for international investment.
The fallout came swiftly and was felt globally after Wednesday's statement that Dubai's main development engine, Dubai World, would ask creditors for a "standstill" on paying back its $60 billion debt until at least May. The company's real estate arm, Nakheel — whose projects include the palm-shaped island in the Gulf — shoulders the bulk of money due to banks, investment houses and outside development contractors.
In total, the state-backed networks nicknamed Dubai Inc. are $80 billion in the red and the emirate needed a bailout earlier this year from its oil-rich neighbor Abu Dhabi, the capital of the United Arab Emirates.
Bloomberg -- Stocks dropped around the world, Treasuries jumped and credit default swaps climbed after Dubai’s attempt to reschedule its debt rattled investors. The dollar briefly fell below 85 yen, a 14-year low, before erasing most of its losses on speculation Japan will intervene.
BACKGROUND ABOUT DUBAI
It seems that Dubai's self-aggrandizing leader has blown his plans to turn this once poor emirate into the money and party center of the Middle East:
Dubai became the Gulf's biggest credit crunch victim a year ago. But its ruler, Sheik Mohammed bin Rashid Al-Maktoum, had continually dismissed concerns over the city-state's liquidity and claims it overreached during the good times.
When asked about the debt, he confidently assured reporters in a rare meeting two months ago that "we are all right" and "we are not worried," leaving details of a recovery plan — if such a plan exists — to everyone's guess.
Then, earlier this month, he told Dubai's critics to "shut up."
But not all Emiratis have lost it. In fact, some have been downright responsible with their newfound wealth:
Abu Dhabi's ruling Al Nahyan family has been more conservative with its spending, investing oil profits into infrastructure, culture and state institutions. During Dubai's real estate bonanza, the Nahyans saw their flashy neighbor race ahead with development plans and tourism plans that had plenty of hype but few details on how they would be pulled off.
Some did materialize. The more than 2,600-foot Burj Dubai is scheduled to open in January as the world's tallest building. But many other projects, including a tower even taller than the Burj Dubai and satellite cities in the desert, are still just blueprints.
When I lived in the UAE teaching math at their national university in al-Ain during school year 94-95, I got the impression that Abu Dhabi was a very decent, modern, but modest city, whereas Dubai may have been more fun, but was more like a haven for playboys and apparently more scoundrels that I realized at the time.
MARKETS ARE MELTING
The latest overnight trading numbers I have from Bloomberg:
Japan -2.5%
Hong Kong -4.5%
Shanghai -2.5%
Taiwan -3.5%
Korea -4.5%
Australia -2.9%
India -3.4%
Russia -4.0%
UPDATE: European futures markets indicate about (1.4%) at the opening there. Europe declined yesterday and is stable today at this moment (9:02 AM ET).
American futures markets indicate about -2.8% at the opening here.
THE DOLLAR is trading at near long-term historic lows against the yen and is losing a long-term battle for supremacy against gold.
The way I read Krugman, he thinks WE ARE NOW HEADED INTO A DEPRESSION:
Yep: three years from now, we’re still in a liquidity trap, with no reason to raise rates above zero and a continuing need for quantitative easing and fiscal expansion.
As far as I can tell, what’s going on in monetary policy debate is a policy in search of a justification. Many central bankers just hate, absolutely hate, being in the position of being so accommodating; yet economic analysis offers no justification for tightening. So they’re inventing new policy doctrines on the fly to justify doing what they want to do.
It’s a familiar story: see Japan’s premature exit from the ZIRP in 2000, and also see 1937 — which was a monetary as well as fiscal bungle.
The truth is that policy should be piling on, not looking for the exit. But central bankers can’t wait to pull away the punchbowl, even though the party hasn’t started, and shows no signs of starting for years to come.
Ramsay MacDonald was Britain’s first Labour Prime Minister. After a brief first stint in the first half of the 1920s, he led a more solid coalition to power in 1929. One might have expected big changes in a country that was, at that time, still deeply class-ridden and marked by huge inequality.
But MacDonald wasn’t able to get very far with his legislative agenda, thanks in part to obstructionism in the House of Lords. Worse, his key economic officials — in particular, the Chancellor of the Exchequer, the equivalent of the US Treasury secretary — were wedded to economic orthodoxy, leaving them unwilling and unable to cope with the coming of the Great Depression.
The result was both economic and political failure. Real change didn’t come until after World War II.
Why am I thinking about this historical episode? I’ll leave that as an exercise for readers.
Basically, Krugman is saying that if President Obama doesn't change the conventional thinking of his economic team, we are doomed to sink into Depression.
UPDATE(10:49AM ET): KRUGMAN WEIGHS IN ON DUBAI
As far as I can tell, there are three ways to look at it — three stories, if you like, about what Dubai means.
First, there’s the view that this is the beginning of many sovereign defaults, and that we’re now seeing the end of the ability of governments to use deficit spending to fight the slump. That’s the view being suggested, if I understand correctly, by the Roubini people and in a softer version by Gillian Tett.
Alternatively, you can see this as basically just another commercial real estate bust. Either you view Dubai World as nothing special, despite sovereign ownership, as Willem Buiter does; or you think of the emirate as a whole as, in effect, a highly leveraged CRE investor facing the same problems as many others in the same situation.
Finally, you can see Dubai as sui generis. And really, there has been nothing else quite like it.
At the moment, I’m leaning to a combination of two and three.
So, is Dubai merely a unique commercial real estate collapse?
Or is this the pin that pops the massive global CRE bubble?
If the CRE bubble DOES pop, what repercussions will it have?
UPDATED(12:44PM ET): Markets around the world have had time to digest the initial news of the Dubai default situation, and have decidedly weathered the storm of uncertainty. I'll be enjoying the rest of the weekend with family! I hope you can to. HAPPY THANKSGIVING, EVERYONE!