Interesting Read

The developed economies are slowly but steadily recovering from the meltdown. Stock markets have already given their verdict and propelled by massive dosages of liquidity, have staged spectacular recoveries from their shaky lows. Commodity prices are also on their way up. Slowly, but surely the financial crisis is over, right? Not so fast. If the red splashed on stock markets around the world today is any indication.

Debt was fuelling not only the American housing bubble. Closer home, it was fuelling Dubai, which had taken on debt to the tune of US$ 80 bn. Out of this US$ 59 bn was taken by Dubai World, the emirate's corporate arm in charge of its ambitious real estate projects. With the severe correction in real estate prices, these projects have now become the proverbial while elephant.

Yesterday, Dubai asked its lenders to defer its debt repayments by six months. It is also looking towards its oil rich and more financially conservative neighbor, Abu Dhabi, for lending a helping hand. While some help has come it way, it is not enough to completely bail out Dubai.

Bloomberg in fact has quoted Mark Mobius, Chairman of Templeton Asset Management, as saying, "If Dubai has to default, that could start a wave of defaults in other areas. This may be the trigger to allow for the market to take a rest and pull back." Mobius oversees US$ 25 bn in emerging-market assets and has a very good idea on the implications of the Dubai default scare.

These developments show that it is premature to declare that the world economy is out of danger. There could be more countries, especially in Eastern Europe, waiting to be bailed out. The developed economies and especially their banks are still vulnerable. In our opinion, investors would do well to remember that there are substantial risks to the buoyant markets. For every bubble, there is always a needle somewhere. And when they meet, all of us learn some very old lessons.