Sunday, November 29, 2009

Questions about the Dubai situation 

I'm not going to rehash the news on the non-default of Arab Emerite Dubai (aka Du-Sell). The financial blogoshere is on the case if you want to monitor unfolding details. Essential blogs Calculated Risk and Naked Capitalism are but two of many that should be checked daily.

Zero Hedge has plenty of interesting speculation about financial exposures to Dubai and whether, or to what degree, Abu Dhabi will step up and honor Dubai's obligations. The Abu Dhabi "shadow" guarantee was apparently so assumed by the market that their less than complete assumption of Dubai's debt has raised fears about their own financial capacity, bringingt a corresponding drop in the price of their obligations. The market is scared again.

I found this line of thinking interesting and disturbing, and a good example of why the site is not highly regarded in all circles.

Let us wonder aloud:

Question: If you are Abu Dhabi, why permit a newsbreaking stand-still request and pop your own cost of capital along with the rest of the region? Surely, you saw this coming long ago?

Question: If you are Abu Dhabi, how might you have hedged your exposure to Dubai? (And who is your counterparty exactly)?

Question: If you are Abu Dhabi, and Dubai had already done all the dirty work of recruiting and deploying slave labor to build the modern version of the Hanging Gardens of Semiramis, mightn't you be quietly buying up distressed Dubai debt just now?

The information asymmetries are huge in this case. Particularly in the Middle East that's usually a hint that foreign investors are going to get their lunch money lifted, find themselves framed for the crime by local authorities when they complain, imprisoned by the uncle-of-the-thief (who also happens to be a judge) immediately before being repeatedly raped while in custody, caned and then deported "accidentally" to Azerbaijan.
Truth or asshattery? You decide.


By Blogger Georgfelis, at Mon Nov 30, 01:14:00 AM:

Rule #1: If somebody in another country wants to borrow money from you, make the contract in *your* country, with collateral assets where *your* country's legal can get their hands on them.

Rule #2: Don't invest in companies that break Rule #1.  

By Anonymous Hal (GT), at Mon Nov 30, 11:57:00 AM:

It's definitely and interesting situation. On it's face it's just a real estate venture gone bust. From that aspect things should be able to get reorganized. I don’t know that it will cause any major down turns to the global markets, though it’s certainly frightening everyone.

It does continue in my mind to be evidence of a global market still requiring medical attention. And a market were people are going to be looking to better assets to protect what’s left of their wealth.  

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