Global stock markets, overreacting to Dubai's debt woes, could mark down stocks too much. Dubai -- which is famous for building a palm-shaped island, the world's tallest building, an indoor ski slope, and paying Rihanna $500,000 to perform at a New Year's Eve party -- wants a six-month reprieve from repaying a $3.5 billion bond.
Why would this be an overreaction? The cost of writing-off Dubai's debt is a tiny fraction of the write-offs from the financial crisis that took $30 trillion off world stock markets in 2008.
Reuters reports that even if Dubai defaults on every penny of its $80 billion in debt, the write-offs that banks will take would be 2.86% of the total write-offs -- $2.8 trillion -- banks will take in the wake of the financial crisis between 2007 and 2010, according to the International Monetary Fund. But the risk to banks outside the Middle East is likely to be far less than $80 billion. According to Reuters, their liabilities related to Dubai World could be as high as $12 billion in so-called syndicated and bilateral loans. To be fair, big banks in the Middle East are exposed -- Abu Dhabi Commercial Bank by $2.45 billion and First Gulf Bank by $1.36 billion.
But with global markets down 2% Friday in light of the surprise bad news from Dubai, and U.S. stocks sliding 2% at the open, there could be some Black Friday buying opportunities -- particularly if this down market continues for a few days. The market is reversing its recent trading patterns -- investors are buying dollars as their fears grow, which is slashing the value of stocks, gold, and oil.
If this Dubai sandstorm passes soon -- as it should -- then buying stocks, gold and oil at today's Black Friday discount could be a good deal.
Peter Cohan is a management consultant, Babson professor and author of nine books, including Capital Rising (due in June 2010). Follow him on Twitter. He owns GE shares and has no financial interest in the other securities mentioned.