The Wall Street Journal points out that the cost of insuring sovereign debt for countries including Bulgaria and Hungary moved up sharply after Dubai announced a “standstill” on paying many of its debt obligations.
The financial world is waiting to see whether another shoe will drop. The value of commercial real estate is down in many large nations around the world. That was a likely cause of some of Dubai’s problems because of its investments in the real estate sector.
Large commercial real estate loans sit on the balance sheets of many global banks and some analysts have asked whether these pools could be as dangerous as mortgage-backed securities were over a year ago. The commercial real estate problem is not one involving a set of exotic financial instruments, but that does not make it any less a threat.
The credit crisis is almost certainly not over. Devaluation is happening too rapidly for loans backing many of these assets to hold their face value. In October, the IMF said it expects banks around the world face another $1.5 trillion in write-offs between now and 2010. If sovereign debt beyond Dubai goes into default, that number could be too low.
Douglas A. McIntyre
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