With Dubai threatening default, Greece enters the spotlight - 30-Nov-2009 - Generational Dynamics

Generational Dynamics Web Log for 30-Nov-2009

With Dubai threatening default, Greece enters the spotlight

Greece will receive a European Union reprimand this week for failing to take "credible and sustainable" measures to reduce its budget deficit, according to Bloomberg News.

Greece's plight is suddenly the focus of worldwide attention in the financial community because of Dubai's bombshell announcement on Wednesday that it would fail to make $3.5 billion in debt repayments next month.

Greece is suffering from the same malaise as Dubai (and, for that matter, the U.S.). The government has been spending money like mad for years. Public debt is expected to rise from 99% of GDP in 2008 to 135% in 2011. External debt is at 14.5% of GDP, and growing.

The situation in Greece wouldn't be causing much concern -- investor complacency has been at an all time high for several weeks now -- but the Dubai situation is making people nervous, and the situation in Greece appears to be similar.

Over the weekend, there have been mixed signals over whether Dubai's neighbor, oil-rich Abu Dhabi, would bail Dubai out.

In London, the Sunday Times headline was "Abu Dhabi rides in to rescue Dubai from debt crisis." But the Sunday Telegraph headline was "Abu Dhabi will not race to Dubai's rescue."

I guess from those two headlines, we're to conclude that Abu Dhabi will ride, but not race, help Dubai.

According to news reports, Abu Dhabi has $700 billion in cash on hand lying around. With that much cash around, it's strange that it won't help out with Dubai's $3.5 billion debt payment due next month. Apparently, relations are not serene between the two neighboring emirates, both part of the United Arab Emirates (U.A.E.).

According to a statement (PDF) put out by the U.A.E. central bank,

"Central Bank of the UAE announced today that it stands behind UAE banks and branches of foreign banks operating in the UAE .

Central Bank has issued a Notice to UAE banks and branches of foreign banks operating in the UAE, making available to them a special additional liquidity facility linked to their current accounts at the Central bank, at the rate of 50 basis points above the 3 months EIBOR."

In other words, the U.A.E. government in Abu Dhabi will make sure that the Dubai problem won't cause a chain reaction putting the U.A.E. banks into default, but it won't do anything to help Dubai itself.

That's what's frightening investors, who had assumed that Abu Dhabi would bail out Dubai for sure, as it has several times in the past.

Investors in Greece had been hoping that the EU would bail out Greece -- again. The Dubai debacle has caused investors to become anxious.

From the point of view of Generational Dynamics, the stock market has been overpriced by 150-200% since 1995, and a stock market crash is 100% certain. (See: "How to compute the 'real value' of the stock market.") The only issue is the question of what will trigger the coming stock market crash. Next week, we may see whether the situations in Dubai and Greece will begin to settle down, or whether they cause more serious problems.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (30-Nov-2009) Permanent Link
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Generational Dynamics Web Log for 30-Nov-2009 With Dubai threatening default, Greece enters the spotlight

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Generational Dynamics Web Log for 30-Nov-2009
With Dubai threatening default, Greece enters the spotlight