Dubai Teaches Us How Capitalism Works

The Business Insider ^ | 12/1/09 | John Carney

[FromLori]

So here’s how Dubai shows us the way forward:

Given the over-the-top reaction of creditors and the western media (including the Financial Times) to the possibility that the Dubai and Abu Dhabi sovereigns might not stand behind the debt of Dubai state-owned companies, it is clear that a debt deferral or a debt default by Dubai World or by Nakheel would indeed be news for a number of market participants. They will have learnt that only sovereign debt is debt of the sovereign and that only sovereign-guaranteed debt is debt guaranteed by the sovereign. A simple lesson but a useful one.

So in the future they will lend to Dubai World or Nakheel or to other state-owned companies in Dubai on terms that reflects the likely absence of sovereign support, should these companies get into difficulties. Those terms are likely to be rather less favourable than terms extended earlier on the belief (wishful thinking) held at the time, that debt of state-owned companies is sovereign guaranteed. The notion that companies from Dubai, state-owned or not state-owned would not have access to the international markets for an extended period of time following a debt deferral, debt restructuring or debt default by Dubai World or Nakheel is ludicrous and counterfactual to a vast range of historical experience.

Ironically, it looks like Dubai has finally become the financial center of the future—leading the world back to risk based lending rather than socialized losses. The future of finance isn’t what it used to be. But it may not be quite as dark as the bailouts by US and European governments had promised.

[FromLori]

ping