Read the Transcript
The text below is a phonetic transcript of a radio story broadcast by PRI’s THE WORLD. It has been created on deadline by a contractor for PRI. The transcript is included here to facilitate internet searches for audio content. Please report any transcribing errors to theworld@pri.org. This transcript may not be in its final form, and it may be updated. Please be aware that the authoritative record of material distributed by PRI’s THE WORLD is the program audio.

Lisa Mullins: It’s pretty rough out there for investors too.  The Dow Jones Industrial Average ended down today.  The Dow lost 173 points to close at 10,818.  Stock markets in Europe also lost some ground today and the markets in South Korea plunged by more than 6%, that’s the biggest fall there since 2008. Many factors account for the volatility of the markets.  Among the most worrisome though are concerns about the strength of European banks.  It’s prompted a sell off of shares in those banks. Otis Casey is an analyst with a company named Markit, which is in New York.

Otis Casey: Some of the activity we’re seeing in the market does suggest some kinds of panic, but you know, I think whether the reaction is overdone or not is not simply a matter of academic debate.  I think some of that reaction is probably justified considering the negative news that’s out there.

Mullins: Do you find it surprising that at this point people would have any kind of concern about the banks themselves and that they would be considered a risk factor?

Casey: I think that investors are becoming concerned about the banks in light of these reports that there’s some banks with challenges in terms of obtaining funding.

Mullins: And what’s the proper way to look at those challenges for you?  I mean as real threats or just let’s see what happens?

Casey: Well, I think you know, we have to be very diligent that these could become real threats if investors respond in a way that goes beyond just selling stock in the banks and go towards more of bank panic kind of mode where they start drawing down deposits because they’ve lost confidence in their deposits being safe in banks.  Then I think we can see even further turmoil than what we’ve seen in the past few weeks.

Mullins: Why would this happen now though because the economic problems in Europe have been around for some time.

Casey: There’s been a report recently that the European Central Bank has been able to obtain dollar access to one particular bank that has not been identified, and you know, this has prompted investors I think to speculate as to which bank that might be, as well as you know, ask the natural question of how pervasive that problem might be; whether there might be other banks that also need this kind of help.

Mullins: So they don’t know which one, so basically, get rid of all the shares?

Casey: The volatility of the past few weeks of the equity market has seemed to unnerve investors and they’re more inclined to get out first and ask questions later.

Mullins: Now I wonder though at the same time, Otis, if there’s an element to this problem being self-perpetuating, or are there real long term ailments specific to banks and specific to banks in Europe that markets have only now woken up to?

Casey: I think there is the chance that it could be self-perpetuating.  People are starting to wonder aloud if that’s the case.  You know, if we continue to see the kind of volatility in the equity markets for example that we’ve seen in the last few weeks.  Investors may lose confidence for some length of time in the financial markets in terms of believing that their money and can find a safe place to invest. I think this is why you’ve seen investors pull their money out of the equity markets and move them into US bonds and gold because they’re concerned that their money needs to be in safer assets.

Mullins: I wonder also if certainly not to blame the messenger, but if you believe that the way this is all being reported worldwide is having an impact on what the markets are doing?

Casey: I think it’s really hard to separate the two.  Clearly the substance of most of the news right now and you know, the economic data sets suggest that you know, we’re in a global economic slowdown, growth is tapering off, there’s more concern about risk in the European financial sectors, so there’s a lot of bad news out there.

Mullins: Otis Casey of Markit, a financial information services provider, speaking to us from New York.  Thanks very much.

Casey: Thank you.

Copyright ©2009 PRI’s THE WORLD. All rights reserved. No quotes from the materials contained herein may be used in any media without attribution to PRI’s THE WORLD. This transcript may not be reproduced, in whole or in part, without prior written permission. For further information, please email The World’s Permissions Coordinator at theworld@pri.org.

Latest Market Data From The BBC

Read tweets about the global economy

Read the Transcript
The text below is a phonetic transcript of a radio story broadcast by PRI’s THE WORLD. It has been created on deadline by a contractor for PRI. The transcript is included here to facilitate internet searches for audio content. Please report any transcribing errors to theworld@pri.org. This transcript may not be in its final form, and it may be updated. Please be aware that the authoritative record of material distributed by PRI’s THE WORLD is the program audio.

Lisa Mullins: I’m Lisa Mullins and this is The World.  Overseas stocks fell for an eighth straight day today.  It’s been a dizzying descent if you want to tally up the damage and maybe you don’t.  Global equities have lost 2-1/2 trillion dollars in value this week.  There was a bit of sunshine on the markets today.  Low and behold the DOW Jones Industrial Average rose 61 points; it closed the day at 11,445.  That finish could have something to do with the fact that the labor department reported today that America’s unemployment rate dipped 1/10th of a percentage point to 9.1%. Louise Cooper is with the London-based brokers BGC Partners.  She says the markets may go up and down, but the global economic problems are persistent.

Louise Cooper: The underlying fundamentals have not changed and they are still dire.  So the debt deal didn’t solve the problem.  Slightly stronger unemployment report, still concerned about recession, and the bigger picture, politicians and policy makers not grabbing hold of these problems and sorting them out.

Mullins: So what’s changed say in the past week?

Cooper: I think slow realization by many investors that crawling out of this big deep hole of debt that we’ve got ourselves into will take a long time.  And I think the problem here is we’ve got a catch-22 situation; we need lots of growth to pay back our debt, and yet the massive amounts of debt means that growth is difficult.  And what policy leaders are there left?

Mullins: And when you mention political uncertainty and whether or not politicians have what it takes to deal with this, it sounds like the markets are saying right now we’re not so sure.

Cooper: It’s truly extraordinary.  I look at the states and think this is the world’s largest economy and it almost went to default.  I mean that is the failure of the political class.  When you look at Europe and it seems to be the same in the Eurozone .  They are making the situation worse, not better, with their comments. Yesterday we had Jose Manuel Barroso who’s the European Commission President.  He said we need to help out more, we need to help these peripheral countries more, these highly indebted countries.  Today we have a German politician saying no, it’s verboten, we’re not writing blank checks.  Well, if they’re gonna have a row, please do it behind closed doors; don’t have it publicly because all that does is make international investors terribly nervous that there are disagreements at the highest level in terms of sorting this mess out.

Mullins: Louise, when we see the fluctuations in the market, are those fluctuations a symptom or are they the problem?

Cooper: The volatility is the price of fear, that’s the way you look at it.  It’s very nervous investors, very nervous traders, very nervous salespeople.  High volatility is never a good thing and it indicates how terribly fearful most people are because you don’t know what a price should be. If you’re confident in your economic growth figures, if you’re confident in your forecasts for a company, if you’re confident in your banking industry will be strong in a month’s time then you can price that.  But if you are highly uncertain about many, many, many things then you can’t accurately price anything, which is why you get extreme volatility.  And markets hate uncertainty.

Mullins: How come we’re seeing jitters in even emerging markets which have been doing well?

Cooper: Emerging markets are highly dependent on the US economy.  If we think the US economy is going to go back into recession, emerging markets will find it difficult to perform.  They still may well perform a little, but it’s tough when the world’s super power is not performing.  And if Europe goes into recession, it’s tough when America and Europe go into recession for other countries to do well.

Mullins: So what could be said at this point or done at this point to settle the markets?  I mean the markets ebb and flow, they seem to do it all at once, all together right now because they are so linked.  What could create stability?

Cooper: We could really do with some better news on economic growth, but I think that’s unlikely.  And I think more leadership from politicians in dealing with the really difficult questions, which they’re just not doing.  You know, the tough decisions — either we bail out Greece and we transfer massive amounts of wealth to Greece, or Spain, or Ireland, or Portugal, or Italy, and we just accept that is the price for the Eurozone.  Or we allow them to exit the Eurozone, they devalue and they go it alone.  Everyone thinks we can just fudge through this middle way and I think what a lot of investors are saying are we can’t; you need to make the tough decisions.  Germany, bailout the rest of the Eurozone or allow these countries to exit.

Mullins: Okay, just one final question.  I wonder for you, someone outside the United States, and this involves more certainly than Washington, but what do you see as the major problem in terms of direction here in the US?

Cooper: I think from the European perspective the politics doesn’t seem to be quite so visceral as it is in the states.  And I think a lot of us here in the states look at the intransigence, particularly of Tea Party Republicans, and find it utterly bewildering that they would be willing to risk their sovereign nation for a political point-scoring exercise. You know, politics is all about compromise, and taking your country to the edge of a potential default seems an extraordinary thing to risk.  And they should be so glad that they’re in the United States of America because if they were any other country in this world they would not get away with it.

Mullins: Louise Cooper with brokers BGC Partners in London, who’s clearly no admirer of the Tea Party.

Copyright ©2009 PRI’s THE WORLD. All rights reserved. No quotes from the materials contained herein may be used in any media without attribution to PRI’s THE WORLD. This transcript may not be reproduced, in whole or in part, without prior written permission. For further information, please email The World’s Permissions Coordinator at theworld@pri.org.

Read tweets about stock markets

Read the Transcript
This text below is a phonetic transcript of a radio story broadcast by PRI’s THE WORLD. It has been created on deadline by a contractor for PRI. The transcript is included here to facilitate internet searches for audio content. Please report any transcribing errors to theworld@pri.org. This transcript may not be in its final form, and it may be updated. Please be aware that the authoritative record of material distributed by PRI’s THE WORLD is the program audio.

MARCO WERMAN: Around the Middle East, Islamic financiers stood by and watched as the Western financial system imploded last year.  They thought that what’s known as Sharia-compliant investing would keep their money safe.  Then came word last week of the collapse of Dubai World.   It revealed that some Islamic financing wasn’t quite as safe as it was cracked up to be.  The World’s Aaron Schachter reports.

AARON SCHACHTER: Put simply, Sharia-compliant financing is any kind of monetary transaction in accordance with the laws of the Koran.  The most basic of those laws forbids people to buy, sell or invest in products that are haram, forbidden like alcohol, gambling or pornography.  But the biggest financial sin in Islam is usury, or  charging interest.  So Islamic financiers had to come up with something else.  John Foster is former editor of Islamic Banking and Finance magazine.

JOHN FOSTER: And so, instead of just giving money to somebody, okay, to go away and then charging interest, what Islamic finance tries to do is, it tries to go into joint ventures with people. So the risk is shared between the person who is borrowing the money and the person who is providing the capital, and they both share in the profit.  Today it’s called private equity, or even venture capital.

SCHACHTER: To ensure that financial transactions or products are halal, the Muslim equivalent of kosher, financial institutions hire religious authorities to review and approve each product.  One of those authorities is Sheikh Zaher Nsouli, with the Lebanese Islamic Bank in Beirut.  Nsouli says sharing risk is intended keep financiers honest.  He says Islamic finance isn’t against making money, on the contrary.  But it is against taking risk with someone else’s money.

SHEIKH ZAHER NSOULI: You’ll not invest in anything except if you know the business risk is good, it’s healthy for the economy, it’s [INDISCERNIBLE].  You’re much more involved in the real economy.

SCHACHTER: Nsouli says Islamic banks have on average outperformed conventional ones   because when people deposit money, they’re buying shares of real projects that are Sharia-compliant.   But Islamic financing as a whole isn’t immune from Western troubles.

MOHAMMED SAID RAHMAN: If you put a chimpanzee behind a Rolls Royce, is Rolls Royce still a good car or is chimpanzee still a bad driver?

SCHACHTER: Mohammed Said Rahman is Chairman of the Institute of Halal Investing, based in Portland, Oregon.  He says in Dubai, greed got the better of  some  Islamic  financial institutions,  the chimpanzees .

RAHMAN: So what happened is that the chimpanzees that were loaning the money out to the people, their eyes were focused towards quick flip over of profits.  So Dubai was a casino.

SCHACHTER: The problem was something called a “sukuk,”  or an Islamic bond.   In theory, a sukuk should equal the cost of a project, so assets equal liability.   But in Dubai, that wasn’t the case.  They was just as much speculation there as anywhere else.  But John Foster, formerly of Islamic Banking and Finance Magazine, says the Islamic finance industry has lost its way.

FOSTER: What a lot of the modern Islamic banks have done is they’ve tried to recreate conventional finance, except with an Islamic wrapper.  So a lot of the banks would find a sheikh for hire.  But the problem which Islamic finance has got at the moment, it needs to have a good look at itself; it needs to address where it is and what it’s trying to achieve.  It shouldn’t try to be Wall Street, it should be Main Street, and it should be for the good for the whole of humanity.

SCHACHTER: Islamic banker Zaher Nsouli says that’s why the crisis in Dubai may actually be a good thing, at least for Islamic financing.

NSOULI: Dubai World’s crisis will lead to a shift in the way of structuring the sukuk, the way of imitating conventional models.   You need corrections from time to time.

SCHACHTER: Nsouli and others says modern Islamic finance is in its infancy.  Give it a few years to catch on, and for the mainstream to realize that  their form of ethical finance is not just something for the world’s billion Muslims.  For The World, I’m Aaron Schachter, Beirut.

Copyright ©2009 PRI’s THE WORLD. All rights reserved. No quotes from the materials contained herein may be used in any media without attribution to PRI’s THE WORLD. This transcript may not be reproduced, in whole or in part, without prior written permission. For further information, please email The World’s Permissions Coordinator at theworld@pri.org.

• BBC coverage
• Global Economy podcast
• Alex Gallafent on the Dubai crisis

Read the Transcript
This text below is a phonetic transcript of a radio story broadcast by PRI’s THE WORLD. It has been created on deadline by a contractor for PRI. The transcript is included here to facilitate internet searches for audio content. Please report any transcribing errors to theworld@pri.org. This transcript may not be in its final form, and it may be updated. Please be aware that the authoritative record of material distributed by PRI’s THE WORLD is the program audio.

MARCO WERMAN: I’m Marco Werman, and this is The World, a co-production of the BBC World Service, PRI and WGBH Boston.  The Persian Gulf emirate of Dubai today tried to reassure investors about the health of its finances, but investors didn’t buy it.  Stock markets in both Dubai and neighboring Abu Dhabi fell sharply today.  The problem, as investors see it, is Dubai World.  That’s the main investment arm of the government of Dubai.  It’s having trouble repaying billions of dollars of debt, and the emirate’s government has announced that it won’t guarantee repayment of that debt, which, no surprise, makes investors nervous.  The World’s Jason Margolis explains the global implications of this Dubai mess.

JASON MARGOLIS: In terms of major world companies, Dubai World isn’t that big a deal.  When General Motors filed for bankruptcy this year, GM’s debt was nearly three times larger than Dubai World’s.   But Dubai World is different from GM.  The emirate of Dubai owns Dubai World.  So, if Dubai World, or by extension, the emirate of Dubai, can’t meet its debt obligations, that spells wider troubles, says Christopher Davidson, a Dubai credit expert from Durham University.

CHRISTOPHER DAVIDSON: Dubai’s disaster, as it unfolds, is certainly tarnishing the rest of the region.  The rest of the region by reputation will find it difficult to refinance debt too because the cost of insuring that debt increases drastically.

MARGOLIS: Davidson says banks might also think twice before loaning money to emerging economies in other parts of the world.

DAVIDSON: Dubai has tarnished the reputations of emerging markets around the world, especially Asia.

MARGOLIS: Not that there’s anything new happening in Asian markets. In fact, Dubai’s excess could also potentially tarnish other nations that have even less to do with the emirate.

DESMOND LACHMAN: A bunch of countries like Latvia, Lithuania, Estonia, together with Ukraine, and Bulgaria, and Hungary.

MARGOLIS: That’s economist Desmond Lachman at the American Enterprise Institute in Washington.  And Lachman says it’s not only emerging economies that might have trouble getting access to credit.

LACHMAN: If Dubai is reminding people there’s a lot of risk outstanding and if people begin to become a lot more risk averse, lenders become wary about lending to a country that has got very large imbalances.

MARGOLIS: Lachman says some western European countries like Greece, Ireland, Spain and Portugal could have trouble getting loans at reasonable rates.  The problems in Dubai pose another kind of risk to the world economy, to the world’s stock markets.  Banks in the United Kingdom are the most exposed with an estimated $50 billion in outstanding loans to the United Arab Emirates.  American, French, and German banks are all on the hook for about $10 billion each.  These loans sent investors scrambling this week, dumping shares, guessing which western banks are most exposed to risk.  Right now, and this might be sounding familiar, nobody is certain which banks are holding which bad loans.   But maybe it’s not all that bad. Of course, markets often overreact.

DOUG REDIKER: There’s the reality, then there’s the perception of the reality.

MARGOLIS: Doug Rediker is a former investment banker and is now with the Washington think tank the New America Foundation.

REDIKER: The reality there’s a problem in Dubai, there’s a problem in a specific area of Dubai.  Not area geographically, I mean Dubai World and Dubai World’s holdings, but that doesn’t necessarily mean that there are problems throughout emerging markets or throughout the Gulf.

MARGOLIS: But then there’s the perception of the reality.

REDIKER: From a snapshot of a trading floor mentality, if you see “Dubai Crisis” on your screen, you could, without having a greater understanding of the nuance, assume that this a broader crisis, sell your positions in a panic and as result trigger something that really isn’t warranted.

MARGOLIS: Warranted or not, that’s what we saw investors do last week. Whether their perception of reality changes this week, that’s another story.  For the World, I’m Jason Margolis

Copyright ©2009 PRI’s THE WORLD. All rights reserved. No quotes from the materials contained herein may be used in any media without attribution to PRI’s THE WORLD. This transcript may not be reproduced, in whole or in part, without prior written permission. For further information, please email The World’s Permissions Coordinator at theworld@pri.org.

• BBC coverage
• Global Economy podcast
• The World’s Alex Gallafent reported from Dubai in 2007

Read the Transcript
This text below is a phonetic transcript of a radio story broadcast by PRI’s THE WORLD. It has been created on deadline by a contractor for PRI. The transcript is included here to facilitate internet searches for audio content. Please report any transcribing errors to theworld@pri.org. This transcript may not be in its final form, and it may be updated. Please be aware that the authoritative record of material distributed by PRI’s THE WORLD is the program audio.

MARCO WERMAN: I’m Marco Werman.  This is The World.  Shoppers are turning out in strong numbers today for the start of the holiday season, but cloudy economic skies hover over this Black Friday.  Unemployment is high, credit is tight, and most investors have less money today than they did yesterday. The Dow Jones industrial average dropped 154 points to close at 10,310.  Wall Street may have been reacting to financial trouble in Dubai.  That’s the semi-autonomous city-state that’s part of the United Arab Emirates.  The World’s Alex Gallafent begins our coverage.

ALEX GALLAFENT: You may have heard about some of the things that made Dubai famous as a kind of Disneyland for grown-ups.  The indoor ski dome in the middle of a desert, the tallest tower in the world, the biggest man-made islands.  These were all part of a program of colossal spending in Dubai, but it wasn’t paid for with oil money.  Dubai’s wells are dry.  Matthew Martin is editor of the Middle East Economic Digest.

MATTHEW MARTIN: A lot of the massive growth that we’ve seen in Dubai over the past few years has all been fueled not directly off the government balance sheet but by taking on debt from the capital markets.

GALLAFENT: The company at the center of the current crisis is facing the consequences of that approach.  That company is Dubai World.  It’s a real estate group backed by Dubai’s government, and it’s one of the prime movers in the city-state’s explosive growth.  But Dubai World has racked up almost 60 billion dollars worth of debt.  This week the company asked creditors if it could postpone repayments on that debt for six months.  Christopher Davidson is the author of Dubai: The Vulnerability of Success. He says Dubai World’s troubles are the result of a broader economic strategy in the emirate.

CHRISTOPHER DAVIDSON: What we’ve seen in Dubai is trying to build an economy that’s been aimed at bringing in foreign direct investment to keep it in a desert creating a sponge like economy to bring in wealth from the region, from Britain, America, anywhere that wants to invest in real estate.  And this really has been tinkering with Dubai’s historical success as a port economy, a place where money passes through and goes somewhere else. But really, the last few years has seen a shift in the focus of the economy, and that’s really what’s been its undoing.

GALLAFENT: The global economic crisis exposed Dubai’s flawed business model. Real estate prices plummeted after years of flying ever higher.  Foreign investment slowed down.  Mahmood Nadi is a Jordanian mechanical engineer who has worked in Dubai for two years.  He says you can see the emirate’s problems in its glittering collection of high-rise buildings.

MAHMOOD NADI: Almost fifty percent not finished yet, thirty percent still not occupied.  You can say twenty percent are occupied, from the new high-rise buildings. The situation is really not stable.

GALLAFENT: Indeed, Dubai has a skyline bought on credit, and Christopher Davidson thinks creditors are unlikely to accept Dubai World’s request to postpone its debt repayments.

DAVIDSON: For the last several months, there have been a number of international companies that have been owed sums for labor and construction work they’ve conducted in Dubai.  They’ve been rather quiet and polite about that hoping the good times will return, but I think now we’ll get to the stage where lawsuits will be pressed on the government of Dubai.

GALLAFENT: Dubai will probably look to its neighbor for help.  That’s Abu Dhabi, another part of the United Arab Emirates.  Unlike Dubai, Abu Dhabi does have oil.  In February, it bought 10 billion dollars worth of bonds from Dubai.  Many saw that deal as a bailout, but it’s not clear when or at what price Abu Dhabi would come to its neighbor’s rescue again. That uncertainty propelled today’s market worries. Another concern of investors is the lack of detail about how Dubai’s proposed debt rescheduling would work.  But British Prime Minister Gordon Brown predicted today that Dubai’s problems will not set off a second global economic meltdown.

GORDON BROWN: If this is a localized problem, then it can be dealt with, and I believe that that is the case. And I believe that this is one of things that we will see over the next few months as the world economy returns to growth, but it is an event that can be dealt with.

GALLAFENT: That’s a hope investors in the United States most likely share.  For The World, I’m Alex Gallafent.

Copyright ©2009 PRI’s THE WORLD. All rights reserved. No quotes from the materials contained herein may be used in any media without attribution to PRI’s THE WORLD. This transcript may not be reproduced, in whole or in part, without prior written permission. For further information, please email The World’s Permissions Coordinator at theworld@pri.org.