Many investors probably thought that the global financial crisis that the world suffered through during the end of last year and early this year had been solved. Others warned that there was another shoe to drop.
The Dubai crisis, which analysts at Bank of America said may escalate into a "major sovereign default," serves as a reminder that while a total collapse of the world's financial system has been averted, many risks remain.
"One cannot rule out -- as a tail risk -- a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s," Bank of America analysts wrote in a report to clients. They added that Dubai defaulting on its debt would be a "major step back" in the recovery from the global financial crisis and would result in a "sudden stop of capital flows into emerging markets."
Dubai borrowed $80 billion over a four year period to build itself into a tourism and financial hub. It was known for "outrageous" construction projects which even prompted AskMen to compile a list of the Top Ten Outrageous Dubai Construction Projects.
However, just like a real estate speculator in Las Vegas, Dubai has been pounded by the downturn in real estate. It has suffered through a 50 percent drop in real estate prices from their 2008 peak. By comparison, Las Vegas, the worst housing market in the United States, had a 55 percent price drop. However, unlike Dubai, that drop came over a 37 month period versus a single year.
Bank of America said that 'in a best-case scenario, this will remain limited to a Dubai corporate sector problem, with either some bailout from UAE authorities or a market-friendly debt restructuring." They estimated that Dubai's external debt is 103 percent of its GDP.
Not surprisingly, stocks plunged on the news. The Dow was off as much as 233 points before recovering to close down by 154 points, or 1.5 percent at 10,310. The S&P 500 fell 1.7 percent to 1,091. And the Nasdaq dropped by 1.7 percent to 2,138.
For the week, the Dow dropped by 0.1 percent. The S&P 500 was actually up by 0.01 percent for the week. And the Nasdaq closed the week down by 0.4 percent.
Investors will need to watch what happens with Dubai and its debt issues over the weekend. A positive resolution, or signs of one, will likely cause a rally. On the other hand, if the problems drag on, it is likely that stocks will react negatively to the news.
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The Dubai crisis, which analysts at Bank of America said may escalate into a "major sovereign default," serves as a reminder that while a total collapse of the world's financial system has been averted, many risks remain.
"One cannot rule out -- as a tail risk -- a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s," Bank of America analysts wrote in a report to clients. They added that Dubai defaulting on its debt would be a "major step back" in the recovery from the global financial crisis and would result in a "sudden stop of capital flows into emerging markets."
Dubai borrowed $80 billion over a four year period to build itself into a tourism and financial hub. It was known for "outrageous" construction projects which even prompted AskMen to compile a list of the Top Ten Outrageous Dubai Construction Projects.
However, just like a real estate speculator in Las Vegas, Dubai has been pounded by the downturn in real estate. It has suffered through a 50 percent drop in real estate prices from their 2008 peak. By comparison, Las Vegas, the worst housing market in the United States, had a 55 percent price drop. However, unlike Dubai, that drop came over a 37 month period versus a single year.
Bank of America said that 'in a best-case scenario, this will remain limited to a Dubai corporate sector problem, with either some bailout from UAE authorities or a market-friendly debt restructuring." They estimated that Dubai's external debt is 103 percent of its GDP.
Not surprisingly, stocks plunged on the news. The Dow was off as much as 233 points before recovering to close down by 154 points, or 1.5 percent at 10,310. The S&P 500 fell 1.7 percent to 1,091. And the Nasdaq dropped by 1.7 percent to 2,138.
For the week, the Dow dropped by 0.1 percent. The S&P 500 was actually up by 0.01 percent for the week. And the Nasdaq closed the week down by 0.4 percent.
Investors will need to watch what happens with Dubai and its debt issues over the weekend. A positive resolution, or signs of one, will likely cause a rally. On the other hand, if the problems drag on, it is likely that stocks will react negatively to the news.
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