After Dubai : Greece, Italy, Russia ?

Read on Seeking Alpha this morning Edward Hugh's post  - Where the Dubai Fallout Will Land - on the "quasi" default by Nakheel, Dubai World's property developer subsidiary. In place of all the babbling about the Emirates situation, which is of limited interest for the world, though we wish them well of course, Edward gets straight to the possible cascading consequences of this bad exemple.

"Aside from the Dubai issue itself, the big worry now is possible contagion to other markets, with Central and Eastern Europe in the forefront of everyone’s mind, given the overlap in bank exposure. (...) In total, European banks are estimated to have some $40 billion of exposure to Dubai. (...) In particular, European bond market worries grew over the ability of riskier government borrowers from Russia to Greece and Italy to pay back their debts in the longer run. (...)

Greek sovereign debt in particular is attracting a great deal of attention, and this week one historic milestone has been passed, since the cost of insuring Greek debt for the first time equalled that of insuring equivalent Turkish debt. At first sight this is very shocking news, since as recently as 2007, the Turkish CDS spread was trading at about 500 basis points on perceived fiscal risks. The Greek spread, by contrast, was nearer 15bp.(...)

And it is just here that one of the long term consequences of what happened this week in Dubai can be found, since with government after government pressing the accelerator pedal hard to the floor on the stimulus front, and digging ever deeper into the public purse to plug gaps in the bank balance sheets, the perception that paying back all the accumulated debt may be harder than expected, especially with ageing population problems to think about, is now gaining traction among investors. And, once sovereign debt default fears really come up over the investor radar, it is going to be very hard work to remove them."

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