Investors get a wake up call from Dubai: Gottliebsen

Assuming the Dubai World problem is not part of some huge sub-prime-style morass, there could be some benefits in the world’s bankers receiving a warning like this. But for the Australian market, we saw how quickly we can find ourselves in the front line when a crisis erupts.

Global banks and share investors have been worried about Dubai World for some time but when the crisis erupted Australia was the main market open so a lot of selling orders hit the Australian bourse. In the middle of that free fall, my colleague Stephen Bartholomeusz had to make a call on how serious the Dubai World event was. At 12.42pm Bartholomeusz warned of the dangers but then wrote:

“Given that the global financial system has experienced several trillions of dollars of losses, the amount at stake in Dubai is relatively inconsequential. The impact on the global system is therefore more psychological than financial”.

Traders did not take this position and the market continued to fall and that trend was continued in early trade in Europe and New York. But when the panic subsided traders came to the same conclusion as Bartholomeusz and the US market recovered some of the lost ground.

Dubai World’s plea for a moratorium on its $US60 billion of debts was badly handled, but the group has some wonderful global assets which over time can be sold to cut debt.

The Dubai mess has been festering for a long time but with the oil price above $US70 a barrel there is a lot of money in the Middle East to make sure that Dubai is not a wholesale rout.

The most dangerous force in the world at the moment is found in the high-bonus American banking cowboys who are borrowing money at token interest rates from the US government and then gambling with it, knowing that if they win they will receive bonuses and if they lose the US government will have to pick up the tab because the banks are too big to fail.

The US is talking about leaving rates low for most of 2010 so the gamblers will become more and more adventurous increasing the likelihood of a major disaster. The Dubai World debt moratorium might remind some of the banks of the dangers of what they are doing, especially as these cowboys have been punting on emerging markets where returns are high but carry significant risk.

A major failure among an emerging economy borrower would trigger a much deeper crisis than the Dubai World situation. The banking gamblers also punt on commodities, so when the Dubai World crisis emerged we saw commodities slump as part of the withdrawal of the punting money.

That of course affects our mining shares.

And as we see every time there is a crisis, in the Dubai World affair we saw a flood of money going back to the US dollar.

Although it is owned by a government, Dubai World is not that different to many Australian property groups that assembled huge asset portfolios based on borrowed funds. Eventually the whole exercise is unravelled. What’s surprising about Dubai World is the time it took to go bad and the high quality of the assets it owned.

This article first appeared on Business Spectator.