Tuesday, December 01, 2009

When Countries Go Bust

I'll have more to say on this after the quote:

Dec. 1 (Bloomberg) -- Dubai World began talks with banks to restructure $26 billion of debt, including $3.5 billion owed by property unit Nakheel, and said the remainder of its liabilities are on "a stable financial footing."

Debt from subsidiaries including Infinity World Holding, Istithmar World and Ports & Free Zone World will be excluded from the negotiations, Dubai World, one of the emirate's three main state-related holding companies, said in a statement. The cost to protect Dubai debt against default fell to the lowest since Nov. 25. Dubai's main equity index dropped 6.6 percent.

Dubai is seeking to delay payments on less than half its $59 billion of liabilities, easing the potential damage to banks recovering from $1.7 trillion of losses and writedowns from the global crisis. Shares worldwide recovered some of the losses suffered since Dubai announced it would seek a "standstill" agreement on all of Dubai World's debt as the Dow Jones Euro Stoxx 600 gained 1.2 percent and the MSCI Emerging Markets Index showed the first back-to-back gains in two weeks.

Per capita, Dubai is the wealthiest nation on the planet and is 12th in GDP.
Digest that for a second.
Dubai, you may recall, put in a bid to run the ports of the United States back in 2006, and it was only a strong public outcry that scuttled the deal, at least in the form it would have taken.
However, anyone with a lick of sense could have seen this development coming from 240,000 miles away. Literally. When you sink tens of  billions of dollars into inviting people to the desert and your GDP is only $37 billion per annum, you are likely going to go bust, Las Vegas notwithstanding.
They gambled, they lost, and while the United Arab Emirates, of which Dubai is a large part, will help clean up the mess, this development almost certainly commits the United States, in the middle of negotiations with the UAE for a free trade zone, to yet another defense posture in the Middle East, particularly as the UAE has the seventh largest oil reserve and the United States isn't even in the top five importers of UAE oil (China is number one...now do you get the picture?). In fact, it may commit us without invitation to be the defense partner of the UAE, and I'm not so sure we want to be there.
The UAE and Dubai specifically, because of its no-tax, "100% foreign ownership welcome" economy, is a haven for all kinds of illicit activities, from drug running (despite zero tolerance policies for possession) to money laundering. Too, the human rights record of Dubai is pretty spotty, even to the point of refusing to prosecute three Dubai men for raping a Swiss teen, giving him HIV.
Still, if a country as wealthy as Dubai, its profligacy with money aside, can go bankrupt, then how easy would it be for a nation with a far heavier debt-to-income load to fold?
I'm thinking about China. And I'm thinking THAT would be a disaster.