Political Risk Latin America Blog @PolRiskLatam

Dubai’s delay acts as a cautionary tale

Posted in News and Articles, Political Risk by politicalrisklatam on December 7, 2009

by Philip Coggan, for Financial Times Adviser, December 7, 2009.

The decision by Dubai World, the Middle-Eastern conglomerate, to ask for a six-month delay on its debt repayment is a salutary reminder to investors there is plenty of credit risk around.

Only the day before, West LB, the German savings bank, had to be rescued for the first time in four years.

The market reaction to the Dubai news may have been exacerbated by the Thanksgiving holiday in the US and by the clumsy way the story was handled. Everyone knew Dubai was a speculative bubble that had already popped – stories of abandoned cars at the airport are already the stuff of urban legend.

But it was assumed Abu Dhabi, its wealthier neighbour, would bail it out. In fact, Abu Dhabi looks like it is teaching investors a quick lesson in ‘moral hazard’, the sort of lesson they ought to have absorbed after the fall of Lehman Brothers.

Whether the Dubai crisis tells us anything about emerging markets in general is another matter. For a start, Dubai is not technically in the emerging market indices. Second, emerging markets are nowhere near as vulnerable to ‘contagion events’ as they used to be…(continue reading)

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