A black swan in the desert
Just when investors were settling down to lock in a few of the year’s profits and put their feet up for the end of the year holidays, a black swan has come waddling out of the desert to put everything on edge.
The unwelcome cygnus atratus came in the form of Gulf emirate Dubai telling creditors of Dubai World and property group Nakheel that debt repayments would be delayed. Fears of contagion spread widely, hitting world stocks, lifting the dollar out of its basement and driving demand for European debt so much that a roughly 6-month trading range for futures was breached.
It all may settle down soon. Dubai says the problem does not apply to its big international ports group. Meanwhile, the emirate is a pretty leveraged place, but fellow emirates and neighbouring countries such as Abu Dhabi, Qatar and Saudi Arabia are pretty flush with cash. They could even step in to help as a matter of solidarity.
At least for now, though, it is showing just how interlinked everything is. Ok, of course, banks get hit when people worry about expsosure. But who would have thought that a European car company would get clobbered by a debt problem in the Gulf?
The issue is those sovereign wealth funds that have been recycling their country surpluses into investments elsewhere. Qatar owns 10 percent of Porsche, Abu Dhabi and Kuwait own 17 percent of Daimler between them. So it is not just investors worrying about their money in the region, it is investors also worrying about where the region’s money is.
Is country risk taking on a new meaning?