Global Investing

A black swan in the desert

November 26, 2009

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?

Comments
27 comments so far | RSS Comments RSS

I guess they are gonna have to sell some of their gold-plated toilets…

Posted by jp | Report as abusive
 

this may ensure more liquidity would be available in coming weeks

Posted by Steven Tsun | Report as abusive
 

Black swan is a poor metaphor. Let’s find another symbol which includes Dubai’s social pathology. Despite the region, Dubai is not oil-rich, it runs mainly on tourism and real estate, Las Vegas style.Precipitous differences between Dubai’s mega-wealthy and its wage-slave poor make it a jewel of social inequality. As high as its glittering towers reach, its buildings are rooted in social exploitation.Dubai is not a democratically happy place. That contradiction adds to its fragility.World wide, any road traveller can find high-tech, modern gas stations, but inside, filthy bathrooms.That’s a better metaphor.Dubai can look forward to long term recovery when it joins the advanced nations and grows the features of a modern democracy: Enlightenment values (freedom, equality and justice)above wealth; elected leaders; putting reason and science above religion.Democracy rules.And its political leaders should sit down and read about Marie Antoinette.

Posted by Jay | Report as abusive
 

Hey, sounds like more of the same jumping at shadows and over reacting. Seems to be a lot of that going on with all the investors and fund managers looking to stay one jump ahead of the next problem. Somehow it all seem senseless. Just to show again, you can have a lot of money, a fast car, and still over run your headlights.

Posted by f belz | Report as abusive
 

Is the start of the commerical real estate melt down?

Posted by Bill Wiggs | Report as abusive
 

They’ve been buying taps for the bathrooms over there at some hotel at £7000.00 a tap.

Posted by stubad | Report as abusive
 

JP, there gold-plated toilets will become gold-coloured toilets, from nerves!

Posted by valar | Report as abusive
 

So, does this mean that Dubai is the next Iceland? And, if so, does it really matter what happens to it? I for one could not care less.

Posted by Bob Foster | Report as abusive
 

Above comment had sold me until the unnecessary tirade about human rights, democracy, etc, always a convenient argument. Yes social exploitation exists, but many workers from third world countries would rather do these back breaking jobs living in squalor as opposed to back home where the economic and security arrangements are very very poor. The cause of this collapse is purely financial mismanagement, if you lever up and create a city based on unsure foundations, when a great recession comes, it spells disaster. Please be more analytical as opposed to tangents irrelevant to the issue.

Posted by Za | Report as abusive
 

Well said Jay, I’ve lived there for a while and that is a very accurate portrayal of Dubai

Posted by Jimmy | Report as abusive
 

stocks goes down and therefore creates an opportunity for others to buy,, like myselfit’s not so bad

Posted by Angelo | Report as abusive
 

More liquidity just means more chips to place at the Dubai ponzi scheme casino. A modern gleaming city in the middle of a shitty desert, surrounded by an even sh***er middle east… seriously?

Posted by Jack | Report as abusive
 

Istithmar Holdings, was looking to sell assets after the value of their NY real estate, for example, tanked…

 

this financial mess belies the statement that “imitation is the sincerest form of flattery”. it seems as if the gulf states are following in the steps of las vegas.if crude oil takes a dive, then there will really be a bloodbath.

Posted by ezduzit | Report as abusive
 

A black swan is not simply anything that is unexpected. If you borrowed more money than you’re able to repay, any idiot can tell you that you’re heading for trouble.

 

Jay …The term “Blsck SWan” refers to a supposedly impossible event that, in fact, happens. See Nassim Taleb’s book “The Black Swan” for a good discussion.As for this particular situation, Dubai has now, hopefully, learned that it is not immune to the financial risks caused by over-leveraging … certainly the creditors of this project have now learned that the usual rules of risk assessment apply, even when the government of Dubai is involved with a project.

Posted by DaveB | Report as abusive
 

Dubai was built on exploitation and slavery. Those are the basic traits of a greedy establishment that lacks values and long term vision, but blindly pursues wealth without morals. Shaky foundation always brings about a quick fall.

Posted by Jack S | Report as abusive
 

The problem we are facing is as follows:This pile of golden debt financed pile of camel dung is melting in the heat of massive global de-leveraging. This obvious event is considered an outlier or “Black Swan”?I suppose the sound we will hear sooner than later, the sound of the dollar carry trade bubble bursting, will be considered yet another unexpected Black Swan Tsunami that sent AIG, Lehman and Goldman et al to the $hi++er.

 

The ‘concept du jour’ promoted by finance, governments and media alike has been the end of the financial crisis and an imminent recovery.The Dubai flop puts an end to this charade; lenders are just as vulnerable and the system riddled with systemic vulnerabilities as it was in 2007. The change over the past two years has been shifting of risk from private entities to sovereigns. Now, the sovereigns are cracking.Aside from Dubai, there are questions about loans made in other Middle East countries. There are sovereign debt crises boiling over in Greece, Ukraine, Ireland, UK, Japan, Venezuela … not to mention the massive USA debt overhang. The collateral for all this debt is … nothing in particular.The underlying problem is energy; Dubai bet on energy returns that it cannot possibly claim as its clients cannot leverage from energy that is depleted.

 

will it matter 2 years from now, i hope so .could nt happen to nicer folks.this was a con job by a very smart salesman,any body dumb enough could have predicted and any intelegent reporter like msnbc was invited to do bogus p.r.young american reporter who never stepted out usa ,goes to dubai and interview s sheikh and all his oppulence could not see any thing wrong.did warren buffet invested a dime?but evry tom/dick and harry from all over the world ,even DUNKIN DONUTS FRANCHISE FROM FLORIDA WENT AND INVESTED IN REAL EESATE THERE AND LOST THEIR DONUTS.IT IS VERY FUNNY .

Posted by mike | Report as abusive
 

Well I guess the recession is still not over yet. I think more problem will start to surface

 

On no! Where will this end? Will the ski slope shopping mall melt? Naa, not a snowball’s chance in hell.Ron D

 

Greed is good, but it made bubbles sometime. Let women rule Dubai to prevent future trouble.

Posted by Ken Young | Report as abusive
 

The first fatality of Dubai crisis is biz confidencewhich is foundation stone of biz relationships all over the world. The worst suferers will be poor labourersfrom Asian countries. Reviving of confidence will be long ardous road –nobody can predict where it will lead to.

Posted by Mandev | Report as abusive
 

Who didn’t see this coming? These people were building islands in the desert and driving gold plated cars. Now the banks are going to have to repossess all of these orphaned cars and homes (see: http://www.repofinder.com). Good luck to the banks who have to sell the gold plated cars.

Posted by mike | Report as abusive
 

What’s the systematic risk here – note well that the big pundits have already scoffed at there being much systematic risk for the USA, so that has to start you wondering: Didn’t those same fools say the same thing multiple times during 2008, only to have it fly right into their faces?

Posted by Jim in Zhuhai | Report as abusive
 

Investing is getting very complicated with the intervention of sovereign funds. Once something goes wrong in their countries, they will liquidate assets and update the regional stock markets.I think if those rulers in Middle East are smart, they will step in to snap up the bargains after those overseas investors pull out of the market.

 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/