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Dubai debt crisis and you

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Anchor Marco Werman speaks with Matt Slaughter, Associate Dean at the Tuck School of Business at Dartmouth, about how the debt crisis in Dubai could affect people in the US.Download MP3

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MARCO WERMAN: Investors in the United States hope that the Dubai problem can be dealt with, but they’ve got a couple of reasons for concern, too.  That’s according to Matt Slaughter, Associate Dean at the Tuck School of Business at Dartmouth.

MATT SLAUGHTER: There might be two kinds of worries. One is depending on what particular mix of bonds and stocks you own, the world is scrambling to figure out which international banks have direct exposure and other companies have direct exposure to the default by Dubai World. And then, more generally, the second risk is regardless of which assets you own, I think many investors are viewing the Dubai World default as a challenge for thinking about where the global financial economic system might be and some of the risks it faces today.

WERMAN: Now, European markets fell yesterday. Today, Asian markets fell sharply, and it was also a sharp drop on Wall Street as well. Is this all because of Dubai?

SLAUGHTER: I think it was part of it maybe. It’s always hard to know with these high frequency movements, but I think investors in recent weeks have increasingly been voicing concern about how stable the economic recovery really is in different parts of the world.

WERMAN: Dubai World is essentially reacting saying that they don’t have the money to pay off their debts and they’re just going to wait it out.  What impact will that have on western companies beyond banks?

SLAUGHTER: Great question.  Some companies may be doing direct business with Dubai.  It has developed a major construction industry, a major financial industry in recent years.  And so, a lot of trading companies, a lot of construction services companies may have some direct exposure to the challenges that Dubai is facing right now.  And then more generally, again, there’s a sense of increased risk and uncertainty about the economic prospects for lots of companies in lots of parts of the world.

WERMAN: I mean, Dubai has been seen kind of as a bell weather for growth and praised for that.  I think the famous statistic from a couple of years ago was that Dubai had 60% of the world’s cranes there. So massive construction.  But maybe you can characterize for us, Matt, just what Dubai represents today as an economic barometer?

SLAUGHTER: So I think it represents the continued uncertainty about how sustained economic growth is going to be realized in the coming quarters and years.  I think you’re exactly right that Dubai has been the symbol of very rapid economic growth, and in its attempt to diversify economic growth from different sources in a very global world, Dubai has endeavored to position itself as a real center for international trade services, and international financial services.  If Dubai is facing these kind of struggles within world markets, they seem to be saying, “Wow, how do we think about the economic prospects for companies around the world, and also for like governments and sovereign debt that’s being issued by a lot of governments around the world.

GALLAFENT: So it sounds like what you’re saying, Matt, is that this is about confidence, and I guess the final question is could fear in, you know, the debts of Dubai have a compounded negative effect on the markets beyond that of a country or an emirate just unable to service its debts.

SLAUGHTER: I think it could.  Time will tell as with many of these challenges in financial markets, but investors have been watching in the past many months as governments and some companies also have been issuing very large amounts of debt. And so one of the indicators of the increased uncertainty, I think, that Dubai World presents to the world is you see the price of default insurance rising very dramatically as investors I think step back and say, “Okay, maybe we’ve been misperceiving the risk that other companies in other countries around the world face as they struggle to emerge from this very deep depression and financial crisis.

WERMAN: Matt Slaughter, Associate Dean at the Tuck School of Business at Dartmouth.  Thank you very much.

SLAUGHTER: Than you very much for having me on the show.

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