Will Sovereign Debt defaults be the catalyst for the next leg of the financial crises? The Hong Kong Hang Seng index plunged 4.84% last night and the Japanese Topix fell 2.24% as Dubai proposed delaying sovereign debt repayments. Credit Default Swaps, derivative instruments that allow lenders to hedge against the risk of counter-party default surged for emerging markets yesterday. Indicating that the market fears that further defaults are likely in the developing world. Bloomberg quote Nick Chamie, head of emerging-market research at Toronto-based RBC Capital Markets
Dubai is the most indicative of the huge global liquidity boom and now in the aftermath there will be further defaults to come in emerging markets and globally,
If Dubai has to default, that could start a wave of defaults in other areas.”
The problems in Dubai appear to be caused by funding issues with the flagship Dubai World development. The Telegraph reports that markets may have previously assumed that a bail-out was already in place behind the scenes (likely funded by Abu Dhabi). The government statement on Wednesday put that assumption in doubt. Efforts today to reassure markets may be bearing some fruit with European stock markets only trading down slightly today, after significant falls yesterday. The FTSE had suffered it’s biggest one day fall since March.
Adds: Also worth a read The dark side of Dubai by Johan Hari
Meanwhile, stateside, respected bank analyst Meredith Whitney preditcts a double dip recession and urges investors ‘to get out’, if there is a consolition she feels in a double-dip recession the second leg down on the W will be less severe than the first.
No bio, some books worth reading – The Rational Optimist: How Prosperity Evolves – Matt Ridley .
Crisis Economics: A Crash Course in the Future of Finance -Nouriel Roubini, Stephen Mihm