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SurlyTrader is a portfolio manager at a large financial institution who specializes in trading derivatives. He has been in the financial services industry for over a decade and would like to share his experience and enthusiasm in the financial markets with those who have a natural curiosity and... More
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  • Dubai - A Crisis of Confidence 3 comments
    Nov 30, 2009 3:21 PM | about stocks: EEM, SPY

    Many investors associate the bankruptcy of Lehman Brothers with the apex of the 2007/2008 credit crisis.  Indeed, after Lehman Brothers failed, the stock market plummeted, credit spreads blew out, and numerous banks and companies required bail-outs.  Many might believe that the losses from the largest bankruptcy in the United States triggered the collapse in the markets, but in reality it was merely the exposure of risk that spooked investors and triggered a stampede to the exit doors.

    Lehman Brothers served as a shining confirmation of just how much leverage and low-quality loans resided in the financial system as well as how vulnerable financial companies were to liquidity strains.  At $60B in debt, Dubai is not large enough to take down many banks and the concrete losses in the United States (besides $1.2B held by CitiGroup) will be minimal.  The true harm comes from the fact that the frailty of Sovereign guarantees has been brought to light.  Many believed that Abu Dubai would come to its neighbor's rescue in time of financial need, a gamble that simply did not pay off.  Needless to say, this event has put other countries with high debt burdens under the microscope and might be the start of a renewed wave or risk-aversion.

    The default of Dubai only raises interesting questions for investors: How do countries with high debt burdens and ties to the Euro, a currency that they cannot freely print, manage  their way through the financial strain?  What would happen if a country as large as Greece or Ireland defaulted?  Would Japan or the United Kingdom be the next countries under the gun?  Instead of seeing the possibility of a domino collapse of banks, could we instead see a domino collapse of countries?  Who is able to bail out a developed nation and what lasting consequences would that have on the world financial system?

     

    Dubai sent sovereign risk levels in Japan and Greece skyrocketing
    Dubai sent sovereign risk levels in Japan and Greece skyrocketing
     


    Disclosure: Long emerging markets ETF (NYSEARCA:EEM)
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Comments (3)
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  • User 496600
    , contributor
    Comments (8) | Send Message
     
    ST, again a good article.

     

    I agree with you on the fact that people who deem Dubai as being 'small enough to fail' don't realize the systemic effect it could trigger.

     

    Rising concerns regarding sovereign resilience could entail a negative feedback loop. Bear Stearns thought it was financially viable before investors lost confidence in the firm's liquidity and it started to face margin calls.

     

    Historically, sovereign debts have followed credit crunches. Your table also shows that only did Sweden and Norway see CDS Spread tighten (by a mere -3 and -1%). It would be interesting to have on that same table the size of the different economies.

     

    Herd behavior could trigger a jump in spreads as the one observed on August 9th 2007 between overnight rates and the Fed Target Rate. This could be damageable for a lot of states.

     

    Thx again,
    30 Nov 2009, 08:35 PM Reply Like
  • Surly Trader
    , contributor
    Comments (66) | Send Message
     
    Author’s reply » I will be sure to add debt/gdp and overall gdp on the next one. Wanted to get the article out there before it lost its timeliness. The key to much of financial investing is constantly being on the look out for the next proverbial shoe to drop. I am not stating that these things *will* happen, but the slope an be awfully slippery.

     

    On Nov 30 08:35 PM I'm too Complex wrote:

     

    > ST, again a good article.
    >
    > I agree with you on the fact that people who deem Dubai as being
    > 'small enough to fail' don't realize the systemic effect it could
    > trigger.
    >
    > Rising concerns regarding sovereign resilience could entail a negative
    > feedback loop. Bear Stearns thought it was financially viable before
    > investors lost confidence in the firm's liquidity and it started
    > to face margin calls.
    >
    > Historically, sovereign debts have followed credit crunches. Your
    > table also shows that only did Sweden and Norway see CDS Spread tighten
    > (by a mere -3 and -1%). It would be interesting to have on that same
    > table the size of the different economies.
    >
    > Herd behavior could trigger a jump in spreads as the one observed
    > on August 9th 2007 between overnight rates and the Fed Target Rate.
    > This could be damageable for a lot of states.
    >
    > Thx again,
    1 Dec 2009, 03:23 PM Reply Like
  • Surly Trader
    , contributor
    Comments (66) | Send Message
     
    Author’s reply » I will be sure to add debt/gdp and overall gdp on the next one. Wanted to get the article out there before it lost its timeliness. The key to much of financial investing is constantly being on the look out for the next proverbial shoe to drop. I am not stating that these things *will* happen, but the slope an be awfully slippery.

     

    On Nov 30 08:35 PM I'm too Complex wrote:

     

    > ST, again a good article.
    >
    > I agree with you on the fact that people who deem Dubai as being
    > 'small enough to fail' don't realize the systemic effect it could
    > trigger.
    >
    > Rising concerns regarding sovereign resilience could entail a negative
    > feedback loop. Bear Stearns thought it was financially viable before
    > investors lost confidence in the firm's liquidity and it started
    > to face margin calls.
    >
    > Historically, sovereign debts have followed credit crunches. Your
    > table also shows that only did Sweden and Norway see CDS Spread tighten
    > (by a mere -3 and -1%). It would be interesting to have on that same
    > table the size of the different economies.
    >
    > Herd behavior could trigger a jump in spreads as the one observed
    > on August 9th 2007 between overnight rates and the Fed Target Rate.
    > This could be damageable for a lot of states.
    >
    > Thx again,
    1 Dec 2009, 03:24 PM Reply Like
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