Monday, November 30, 2009
Financial crisis never end quickly because the market to absorb product contracts sharply leaving oodles of poorly underwritten deals stranded. These deals need credit enhancement at the least just to roll over or they need a completely new ownership structure with a much stronger player.
However, the remarks here on the CDS market continue to be true. It must be unwound and we see little sign of the will to do so.
Let me make this a little clearer. I do not think that the CDS market can withstand any defaults because it has turned out that the actual insurer is the
fed. Yet defaults must take place because the credit standard necessary is not reached by one hundred percent of the participants. US
In fact these facilities were in place for AAA clients. The rating system was subverted and the financial system loaded with toxic paper. More important, we still do not know the extent of the fraud.
With a still contracting market we must have more such failures until the weak are eliminated.
Dubai shock can and must end with providing a credit facility at a steep price. This all part of ongoing the credit contraction. Abu Dhabi
Financial Crisis in
: Towards a Nightmare Scenario? Dubai
By Mike Whitney
URL of this article: www.globalresearch.ca/index.php?context=va&aid=16310
Global Research, November 28, 2009
The default in
is not the beginning of Financial Meltdown 2. Don't look for dominoes here. Yes, it does raise serious questions about the vast debt-overhang in emerging economies--particularly Dubai East Europe. But, this is not a "sovereign default" in the strict sense, nor is there any great risk of contagion. Oil-rich is loaded with liquid assets, possibly as much as $800 billion. They could pay off Abu Dhabi World's measly $60 billion debt without batting an eye. But Dubai Abu Dhabi wants to send its wastrel younger brother a wake-up-call by forcing to restructure its debt. That means that banks, bondholders and contractors will have to take a haircut, which is not surprising given the abysmal condition of the commercial real estate market. Dubai
On Thursday, Bank of
America analysts issued a statement: “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 in the late 1990s.” Russia
This is nonsense. There will be no sovereign default.
is not going to send global markets into a nosedive to save a few billion dollars. B of A is blowing smoke. Oil has already slipped $3 per barrel since the crisis began. There will probably be a tentative resolution by the time the markets open on Monday. That doesn't mean that there aren't important lessons to be learned from this latest financial calamity. There are. Abu Dhabi
First, it illustrates that the financial crisis is not over---households, businesses and countries are still deleveraging. This ongoing process will slow spending and increase defaults, bankruptcies and foreclosures. Government guarantees and stimulus programs will not reverse prevailing trends. More incidents like
World should be expected. These "credit events" will disrupt the recovery and spur greater risk-aversion which will push stocks downward. Dubai
Arnab Das of RGE Monitor sums it up like this: "We're bound to see a rise in risk aversion. The
situation signifies that although the major central banks around the world have stabilized the financial system, they can't make all the excesses simply disappear. We still have to work out those balance sheet stresses. The recovery is proceeding, but significant challenges still lie ahead.” (Bloomberg News) Dubai
Second, when these incidents take place, there's likely to considerable collateral damage from the unregulated insurance policies (credit default swaps) which underwrite the bonds. These CDS derivatives are not sold on a public exchange so no one knows who holds them, in what amount, or whether the issuer has sufficient capital reserves to pay off claims. We should expect a repeat of AIG over and over again (although smaller) until the system is either regulated or CDS are banned.
The bottom line, is that the current financial architecture is not designed to work; it is designed to make a handful of speculators very rich. These speculators own congress, the White House and the financial media, which is why there has been no meaningful change in regulations.
Dubai is not . There will be a resolution and contractors will get paid, although not "in full." There will be losses. Big losses. But no contagion. Argentina
's payment "standstill" roiled global markets where investor confidence was already thin. The dollar and yen strengthened and Dubai Treasurys surged. The "flight to safety" is making it doubly hard for the Fed to reflate asset prices. Dubai-like credit events make investors jittery and they pull in their horns. That extends the slump and deepens the recession. US
crisis drags on, the dollar will get stronger and the flourishing carry trade will crash. That means that the maxed-out banks (which are heavily invested in high-risk positions) will get clobbered once again. That's the nightmare scenario. Dubai
The Fed has wrapped its arms around the financial system and provided unlimited guarantees on trillions of dollars of dodgy collateral. But that might not be enough.