Wall St. WTF: It may be a storm in a teacup, but it can still kill you if you live in the teacup

So the Dubai World Drama continues. The powers that be at Dubai World are grudgingly considering raising to 2% from 1% the interest rate they’ll pay on the extended loans. Analysts say this would result in a 20-25% loss to the creditors. This is because while they would nominally get their principal back the amount of money they would earn in interest would be far less than they are expecting or could get elsewhere if they were paid back in full on time. Nakheel suppliers on the other hand are getting cash this month plus an Islamic security that will yield 10%. Reuters is reporting that the Bankers are not happy. Perhaps not unhappy enough to try their luck with a declaration of default but unhappy enough to push for more. The drama is not over.

Support for the deal is coming from an unsurprising source: Dubai itself. In a letter to the editor Nasser Al Saidi, the Chief Economist of the DIFC, has published a rousing defence of the Dubai World restructuring and has attempted to draw some lessons from it. While it is not surprising that Dubai is praising itself for its handling of the crisis two things are disturbing about the letter. The first is that the crisis is far from over: the Dubai World creditors have not accepted the plan, the losses elsewhere in Dubai continue to be staggering and Dubai has no room left to manoeuvre without another appeal to Abu Dhabi because they have completely drained the DFSF. The Second is the very disturbing sense I get from reading the letter that the powers that be in Dubai have neither a sure grasp of reality nor an awareness that, here in the future, their bold assertions of the impossible inspire laughter rather than awe.

Dr. Al Saidi says that the restructuring proposal “removes the cloud of uncertainty” which has hovered over regional markets of late and points to the recent declines of the Dubai CDS spreads from their crisis highs. Unmentioned goes the fact that Dubai CDS are still 150 bps higher than they were before the crisis began, are higher than either Portugal or even Lebanon both of which are in serious fiscal trouble. At 414 are right about where Greece was before its’ spike to 1000 and then forcible bailout by the IMF. It would seem that some uncertainty remains.