The opening last week in Dubai of the Burj Khalifa, the world's tallest building at 2,717 feet, is a physical reminder of an under appreciated risk for 2010: the possibility that countries that rode the debt issuance boom of the mid-2000s will have trouble paying their creditors. (The Philadelphia Inquirer and Britain's The Independent have also documented the human cost of Dubai's rapid construction.)
Any review of the credit crisis or a look into Federal Reserve Chairman Ben Bernanke's reappointment hearings, will note the number of people who believed that residential real estate issues were limited to a fraction of the population falling in the category of "subprime" borrowers. So it seems thus far with sovereign debt issues, with only Iceland and Dubai (a part of the U.A.E.) making headlines; Dubai received a bailout from neighboring Abu Dhabi, while Iceland was not so fortunate and is moving toward holding a national referendum to decide whether to bail out foreign bank depositors (indications from the President of Iceland suggest they will not, saving the country significant debt in the process).
Sovereign debt issues so far pale in comparison to problems with the U.S. financial system, but as the Burj Khalifa serves to remind, many countries took on debt for various purposes and not all the uses of those cash borrowings were economic. Ominously, just as with subprime mortgage debt, some investors are warning that the problems right now are merely the calm before the storm.
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