Dubai Fallout: Not with a Bang, But a Whimper

Nov.30.09 | About: WisdomTree Global (DEW)

Except for Greece, whose credit protection trades +72 basis points wider than it did a month ago, market response to the Dubai default is surprisingly muted, as the table below from Markit Partners makes clear:

Worst Performing Sovereign Credit Default Swaps

Ticker CLIP Name Doc Clause 5Y Today Daily Chg (bp) Weekly Chg (bp) 28 Day Chg (bp)
LITHUN 589EFF Rep Lithuania CR 347 19 11 21
PHILIP 789AAE Rep Philippines CR 199 18 21 14
VIETNM 9B8D7L Socialist Rep Vietnam CR 229 17 22 30
ROMANI 7ECDET Romania CR 303 14 10 30
GREECE 4G5656 Hellenic Rep CR 208 14 22 72
Click to enlarge
Click to enlarge

It seems fanciful that the rest of Europe would allow Greece to default, but that is beside the point. The sharpest widening in credit default swap pricing occurred not in the soverign world, but among Japanese corporates:

Corporate Credit Deterioration - 26 November 2009
Ticker CLIP Name Doc Clause 5Y Today Daily Chg (bp) Weekly Chg (bp) 28 Day Chg (bp)
TAISEI 8FB419 TAISEI Corp CR 396 36 50 106
KAJIMA 4CB422 Kajima Corp CR 330 32 46 135
SUMIRD JQEFEB Sumitomo Rlty & Dev Co Ltd CR 284 29 45 58
PREUSS DLCCCO TUI AG MM 996 24 35 69
ORIX 6EE963 ORIX Corp CR 394 23 35 -45
HAVAS FJBDFF Havas MM 231 20 31 11
SHIMIZ JQ9689 Shimizu Corp CR 174 17 21 54
GAZPRU 39EAAF JSC GAZPROM CR 262 14 17 10
NIECO NT952F Nielsen Co MM 549 14 -4 -3
OBACRP JOEHA8 OBAYASHI Corp CR 212 13 24 67
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Click to enlarge

The fallout was worst among Japanese builders like Kajima directly exposed to Dubai.

Abu Dhabi has already thrown a tarpaulin over its own banks to dampen contagion, and it is the tradesmen left with unpaid bills who will suffer most from Dubai’s problems–and the world will take little notice of their problems.

Far more worrying is the commercial real estate problem in the United States, the continued high rate of homeowner deliquency, the huge backlog of foreclosures–in short, the whole range of problems that stem from an effective unemployment rate (including “discouraged” and underemployed workers) of 17.5%. The cumulative effect of the popping of innumerable mini-bubbles, none of which are large enough to take down the system but all of whom together constitute a millstone around the neck of the banking system, will keep lending weak and the economy in very, very prolonged recession.