To make a long story short, high-flying Dubai, where billions of dollars of gleaming skyscrapers magically blossomed from the desert, has asked for a moratorium on its debt payments. World markets wilted at the news.
Of course, Wall Street is shut for Thanksgiving, but one wonders what will happen when it opens tomorrow. And a bigger question is, since Dubai was the darling of the something-for-nothing financiers, how much of the quadrillion dollars
in derivatives out there are based on the hyper-overvalued buildings in Dubai? If those instruments lose so much as 1% of their value, after all, it sucks an amount of money out the global economy roughly equal to the U.S. GDP.
For several months now, there have been comments about how commercial real estate (CRE) has overshot its true market value even more than the housing market did before its correction began two years ago. The impending default of Dubai is only going to add to those fears. U.S. banks are still weakened rather substantially by residential mortgage defaults...a CRE default on that scale would likely bring about the end of many of them. After the first round of bailouts, there's scant political will in Washington to extend a second tranche of tax dollars to shore up banks.
The next several months are going to be rather interesting...