LILA RAJIVA: The Mind-Body Politic
Individuals Not Ideologies
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Abu Dhabi Agrees to Selective Bail Out
“We will look at Dubai’s commitments and approach them on a case-by-case basis,” the official told the Reuters news agency by telephone, adding: “It does not mean that Abu Dhabi will underwrite all of their debt.” Al Jazeera, November 28, 2009
An unnamed Abu Dhabi official has said that the rich UAE [United Arab Republic] emirate will help its spendthrift neigbour Dubai on a case by case basis.
This gets pretty interesting for all the other countries out there with sovereign debt problems .. even though, as I blogged earlier, Dubai´s is not a sovereign debt problem. It´s a problem for Dubai World.
However, there seems to be a perception issue involved, which is causing credit default swaps for Irish banks to rise dramatically.
What´s going on?
This isn´t the first time the Dubai story has caused jitters in the market. Ten months ago, Dubai CDS´s rose to record levels on fears that neighboring and much richer Abu Dhabi wouldn¨t ride in to the rescue.
But that was Dubai CDS. Now it´s Irish CDS´s that are up.Over at the Baseline Scenario, Simon Johnson has an explanation. He says the Irish tremors are caused by the perception that as Dubai goes, so go the other sovereign debt crises around the world:
1. If Dubai can effectively default or reschedule its debts without disrupting the global economy, then others can do the same.
2. If Abu Dhabi takes a tough line and doesn’t destabilize markets, others (e.g., the EU) will be tempted to do the same (i.e., for Ireland and Greece). “No more unconditional bailouts” is an appealing refrain in many capitals.
3. If the US supports some creditor losses for Dubai (e.g., because of its connections with Iran), this makes it easier to impose losses on creditors elsewhere (even perhaps where IMF programs are in place, such as Eastern Europe).I´m not sure I follow this reasoning at all. Nor do I understand why Mr. Johnson seems to think this adds up to strengthening Ben Bernanke´s hand…..
Let´s see. Is Mr. Johnson saying that if picking and choosing whom to rescue is OK for an Arab sheikh, it should be good enough for Ben Bernanke?
Frankly, that sounds less like an explanation and more like advance PR for the Fed to engage in arbitrary treatment - bailouts - of banks and other companies..
[Update: And lo, it turns out that Ben Bernanke does need all the help he can get. He wants his power, dammit...see this oped at the Washington Post, hat tip to EconomicPolicyJournal]
A more convincing explanation of the Irish reaction than Johnson´s is Irish exposure via investment and employment to the Dubai economy.
“The Emirate was a Mecca for the Irish glitterati during the Celtic Tiger years, with many would-be investors taking a gamble. Ireland captain O’Driscoll bought an apartment in the e389million Tiara Residence in 2006 off the plans. However, the property may now be worth much less than the €500,000 he paid for it.
But thousands of Irish investors are facing the prospect of their Dubai prop-erties plunging in price. Price drops in Dubai have been severe. According to Knight Frank Global House Price Survey, prices dropped by 40%.
It’s all a long way from the glittering heights of the middle of the decade - and from the 1980s, before the ruling Al-Maktoum family decided to turn their dusty emirates into a leading city.
The Irish have shaped the landscape of Dubai like few other nationalities, with Irish builders, engineers and architects prominent in building up the city state.
But now, question marks hang over the fate of hundreds of Irish who escaped the slump at home for jobs with companies under Dubai’s control.”
More here.
Gulf Arabs to Move Out of Petro-Dollar (Updated)
Update:
I’m adding my comment at the top here after watching this puzzling day. Gold shot up to new highs over $1040 (and not just in the US but elsewhere). Is this the bull break-out the bugs have been waiting for? Maybe. Central bankers and officials from the Gulf states came out to pooh-pooh the story, but it couldn’t be put back in the box.
My puzzlement is this: If gold is soaring because of this “revelation” of the dollar’s death - then why did the dollar itself sink only modestly (at least, as I write).
I note also that the stock market recovered some of its ground. That might have something to do with the Australian Reserve Bank announcing a tighter policy, quite unexpectedly, and in apparent belief that the recovery is real, never mind Joseph Stiglitz, George Soros, Marc Faber, Jim Rogers, and other no-longer-strange bedfellows who think the opposite.
V-shaped, U-shaped, Square-root shaped, or corkscrewed, the recovery isn’t your grandfather’s recovery, that’s for sure. And someone is trying to make a silk purse out of this sow’s ear. That skepticism leads me to wonder whether this very convenient rumor, which coincides with the IMF meeting in Istanbul, might be a certain kind of saber rattling in anticipation of negotiations - except that these very public meetings are never where anything substantial takes place any way. (So says Simon Johnson in a recent blog post). But the IMF is selling gold, we know, and we know also that it wants to make sure it doesn’t hit the markets too hard when it does. Could this little upswing be helpful toward that end? Probably. Could this rumor - widely denounced as insubstantial - have something to do with that? Perhaps.
In the news, the Independent’s Robert Fisk reports on the coming fall of the petro-dollar:
“In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading
In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.
Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.
The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.”
Major Market Move in Offing
Looks like there’ll be a good deal of volatility ahead in the markets this coming week and through the fall:
*From Monday last week onward, New York has been riled up by the news out of China that Chinese SOEs (State Owned Enterprises) might walk away on derivative contracts that they think have been deeply manipulated. (They’re right on that). The SOEs involved are Air China, China Eastern, and Cosco.
*The derivatives are not mortgage-backed securities (the cause of the 2008 melt-down) but - likely- hedged oil futures in the OTC (over the counter) market, which is unregulated (that is, the SEOs hold synthetic longs).
*The threat - if it is that - has forced gold out of its summer trading range to within points of the $1000 mark, before falling back..and it pushed up the Chinese market by about 5%.(Sept 3)
*The counter-parties are 6 foreign banks, said to include Goldman Sachs, UBS, and JP Morgan. Goldman could take a hit on the contracts for around $15 billion, it’s rumored.
Note: The Chinese have been buying IMF bonds (50 billion) and watching the US meltdown and “stimulus” hocus-pocus with a good deal of warranted alarm, because all it means is their investments are being manipulated and driven down.
Obama’s reappointment of Bernanke was also taken as a bad sign by the Chinese. (correctly).
*Rumors have been swirling of further defaults of major US banks.
*The G20 has a preliminary meeting this weekend and the Chinese are said to have put the purchase of off-market gold on the table.
*The Chinese are pushing gold and silver on their populations, probably in anticipation of a currency meltdown.
*Meanwhile, Hong Kong has asked for all its gold to be returned from London.
*Last week, Germany asked for all its gold to be returned from London.
*Meanwhile, Abu Dhabi Commercial Bank and King County, Washington State have brought suit against Moody’s, S&P, and Morgan Stanley on fraud charges for the contracts they wrote, a case that would have massive implications for how other contracts are treated.
*[Oddly (?), Washington State is also where the earliest swine flu cases in the US were detected and where one of the largest outbreaks on campus just surfaced today - with some 2000 students at Washington State University coming down with the virus. Washington State had previously received large grants from Homeland Security for emergency preparations for pandemics, had TV Public Service Ads in place, had written up plans and practiced exercises].
Are Speculators to Blame for Soaring Oil Prices?
Mike Martin has a piece on speculation at Huffington Post today arguing that the movement of oil prices is just the result of supply and demand and that speculators are taking the rap unfairly.
Read the Article at HuffingtonPost
This was my comment:
Good piece.. We all speculate, to different degrees, and over different time frames. Some of us do it consciously, others do it more unconsciously.
I think it’s fair to say that speculation in certain things - food and land, for starters - has social consequences we shouldn’t brush aside. But as long as money is not being priced correctly (the interest rate is held artificially low), people have an incentive to get a better return.
The underlying problem is created by the government….
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