LEX Last week world stock markets tanked on news of Dubai World’s debt standstill (a delightful euphemism for default). Risk trades from commodities to the Australian dollar were jettisoned as investors reached for the safety of bonds and the yen. Global fundamentals, however, have not changed from Wednesday. Dubai’s woes may dent the odd bank, but aggregate corporate earnings will barely be affected. Consumers around the world could not care less. Nor does trouble in the Gulf affect other influential themes of the day such as western public and private sector indebtedness, or growth in China.
So why the panic? There are sensible explanations. The first is that after a too-quick-to-be-true recovery from the biggest meltdown for generations, Dubai is a reminder the world is not out of the woods. A large default in some faraway land reinforces the sense that another shock can come from anywhere. Second, the news is slapping investors out of their silly belief that emerging markets deserve risk premiums barely above developed ones. Finally, Dubai is a warning not to assume investments are always state-guaranteed, even in this age of government largesse.
