Dubai World has rocked the financial world by knocking oil and commodities out of their comfortable trading ranges at least for a day. The sneaky announcement that wanted the Dubai World fund, the country's sovereign wealth fund, to delay by 6 months the payment on billions of dollars of its total $80 billion debt, caught the markets and holiday vacation traders off guard. This led to the larger question as to the fall-out from this missed payment and what banks have exposure to it. The other question is whether the United Arab Emirates would step up and bail out the Dubai World fund.
And now we know that at least the UAE will stand behind the banks, both local and foreign, and will provide liquidity as needed. The UAE Central Bank will allow banks to borrow money for half a percentage point above the three-month local benchmark interest rate. That should keep the banks running and hopefully avoid a panic. That does not mean of course that Dubai World will still not default on its debt. In fact now we're hearing that the Dubai government is saying that they do not guarantee Dubai World debt but what is more disturbing is that they are saying that the banks do not need more liquidity.
For commodities this new wrinkle in the global economic crisis forced traders out of what had been their carry trade comfort zone. The "sell the dollar and buy anything that wasn't the dollar" lost appeal as traders ran away from the risk taking mode and ran back to the dollar as the Dubai crisis leveled out. Now it looks like the market is getting carried away with that trade again. We know the game plan on this crisis, and that is to bail someone out, print more money and ask questions later.
In other world news, Somali pirates hijack an oil tanker that was on its way to the US from Saudi Arabia. Iran also says it will not stop construction on its secret nuclear facility and plans to build 10 more -- maybe they can get a loan from the UAE.
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