Dubai debt crisis is contained -- and hardly a surprise

After the world's experience with subprime lending, probably the worst call a prognosticator can make about a debt crisis is that it will remain "contained." So here goes nothing: Chances that the would-be deadbeats in Dubai will set off a series of defaults among emerging market countries seem very, very remote.

When Dubai World, the investment arm of the Disney World city-state, said it would miss a $3.5 billion bond payment (a fraction of its $60 billion to $100 billion in liabilities), emerging market stocks swooned and the U.S. dollar soared -- pretty much the opposite of the global reflation trade that has done so much to repair our battered 401(k)s. In other words, things were looking ugly.

Cut to Monday -- and with the exception of shares in Europe, whose banks own 70% of Dubai World's debt -- the dollar is once again falling and our beloved emerging markets are trudging hesitantly upward. From Wednesday's to Friday's close, EEM, the iShares MSCI Emerging Markets exchange-traded fund (EEM), coughed up 4%, while the dollar spiked on a global flight to safety. Give investors a weekend to digest the news and voila: EEM is posting some fractional gains and the dollar has resumed its slide.

Maybe it really is different this time (say after me: no jinx, no jinx, no jinx). Dr. Peter T. Treadway, chief economist at CT Risks, a risk-management firm in Hong Kong and author of "The Dismal Optimist" investment letter, certainly thinks so. For one thing, bank losses from the global credit crisis sparked in 2007 amounted to more than $3 trillion, with Lehman Brothers alone accounting for more than $600 billion.

"The Dubai debacle is minor by this standard even if it turns out the number is more like $100 billion rather than $60 billion," Treadway told clients Monday. "Dubai will not become Demon Brothers." (DailyFinance's Peter Cohan says much the same thing.) Perhaps more important, Treadway says, is that this isn't a sovereign debt crisis a la Argentina 2001; it's a real estate deal gone bad.

"Busted real estate deals get restructured and life goes on," says Treadway. "Remember Canary Wharf. It went broke in the 1990s but like a phoenix it arose out of bankruptcy to become one of London and the world's most successful real estate developments."

But most important, there's just not enough dry kindling on the balance sheets of other developing nations to set the world ablaze with emerging market defaults. Brazil, India, China, Taiwan, Chile, Mexico and all of Southeast Asia (except for Vietnam) have been deleveraging since the 1990s. If anything, they have a surfeit of dollars, and "are not going to default on anything," Treadway says.

Dennis Gartman, author of the well-regarded investment newsletter bearing his name, worries that continued uncertainty could force the dollar materially higher, but more for psychological than fundamental reasons, noting that even if Dubai were to wholly collapse and all of its debts were to be rendered worthless, that figure's "really not much more than mote in the eye of the global economy."

Indeed, if there's anything shocking about the Dubai debacle, it's that it took so long for the bubble to burst. As Jeffrey Saut, chief investment strategist at Raymond James, wrote Monday: "The handwriting was on the wall back in 2006 when 24% of the world's construction cranes were operating in Dubai. If that's not the sign of a bubble I don't know what is."


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