Saturday, November 28, 2009

Abu Dhabi will step up

The Dubai debt crisis is serious. It is likely to be solved soon. The UAE is a confederation of seven dictatorships aka sheikdoms that run roughly with a Jeffersonian vision of a Constitution(not of rights), states have more power than the central government. They are joined in a way that gives the whole much more power in foreign economic and political affairs and Abu Dhabi is the center and the greatest source of oil wealth.

To let Dubai precipitate another round of the global credit crisis would be catastrophic for the grand plan already well in place. Dubai aside, there are smart investors with great influence in the UAE. They know the risk/reward of this situation. Abu Dhabi will bail out Dubai, and this will be the opportunity for the head of Abu Dhabi to reign in the profligate sheikdoms and go Federalist. There will be a price for the bail out, and it will likely be the end of the unchecked power of the Dubai Prince who reveled in the attention that his grand plans attracted. He was outside of the norm of immense Arab wealth and simply acted like so many of those mid-level Saudi royal family members in London, unattractive attention seeking spending.

With Dubai resolved, if this perspective flows, the problem will be that the market's short antenna has been raised to focus on other emerging market countries with debt that may be edgy and who have no daddy like Dubai's Abu Dhabi.

If there had been any regulatory effort to deal with the naked short capacity of credit default swaps during the global economic crisis of the last two years this would not be a big issue. Now nations are not exempt from short attacks on their debt and if this kind of chain reaction starts it will be dicey for awhile. The outcome will be uncertain but maybe naively I think that the more aggressive buyers of credit default swaps will get burned this time, or maybe I just hope so.

Once again the question is raised. Why no regulatory action on this toxic security. Who is behind this. I wouldn't ask the question if I didn't have a point of view.


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