My latest op-ed for the Providence Journal is now available online. I discuss the crisis in Greece and the lessons it holds for the United States.

Read it online at Projo.com, and join the discussion there!

International headlines have recently focused on Greece, one of the 16 countries in the European Union whose currency is the euro.

Greece is in danger of defaulting on its national debt. The reasons are obvious: too much spending and not enough tax collection. The Greek budget deficit reaches 12.7 percent of its gross domestic product and its national debt represents 113 percent of GDP. These numbers are worryingly similar to our own balance sheet, with debt equal to 73 percent of our GDP (but growing fast) and budget deficits at 10.6 percent.

Greece’s potential default has sent shockwaves through global bond and stock markets, which could end up equaling or even dwarfing our subprime housing and banking crisis. As a result, the U.S. dollar has strengthened against the euro and the interest buyers demand on Greek bonds has gone up. A few other E.U. countries, perhaps most notably Spain and Portugal, are also in trouble because of their uncontrolled borrowing and spending.

Read more…

Two weeks ago, I wrote about the debt crisis in Dubai. The markets convulsed on news that Dubai World, the huge state-owned corporation which runs many of Dubai’s buildings and investments, might delay or default on its debt payments.

This week creditors, and markets, were relieved to hear that Abu Dhabi, the richest emirate and heart of the federal government of the United Arab Emirates, would bail out Dubai World to the tune of $10 bn and enable Nakheel PJSC, the real estate subsidiary, to pay back a $4 bn sukuk or Islamic bond.

Just as I predicted, Dubai World was too big to fail. The fallout from a default would have poisoned markets across the region and probably irreparably damaged the U.A.E.’s already tainted reputation. Authorities described the Nakheel sukuk as a linchpin of the ongoing debt negotiations, saying ““The whole capital structure was a web of cross-defaults – the only way to calm this was to pay off the sukuk.”

Anyone who bought the sukuk maturing on December 14 when it hit rock bottom at about 48 cents on the dollar made a tidy sum today as it jumped as high as 109.5 on the dollar. Nakheel was widely expected to enter into bankruptcy.

Dubai has always been the public face of the emirate while Abu Dhabi has always held an outsize portion of the oil revenues and thus, the emirates’ wealth. No doubt there will be a degree of control re-asserted over Dubai, although it’s difficult to say what that will entail – more conservative fiscal, religious, and social policies and priorities seem likely.

The city-state also pledged to push for “transparency, good governance and market principles” and passed a new bankruptcy proceedings law.

For now, it looks like Dubai World’s fat has been pulled from the fire. We’ll see how things develop as more of the debts come due.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aVD2G_.A8UEc

Saleh and Turan are mentioned here based on our involvement with Russian debt in the past:

“A lot of debtors in 1998 said they’d never touch Russia again, but memory in the bond market is short, so they are all lining up,” said Saleh Daher, the managing director of Boston- based Turan Corp., which owns Russian debt dating back to the Soviet era. “There is a wall of cash looking for investment, in particular in the emerging-market bond world.”

We learned an expensive and painful lesson in 1998 about “too big to fail.” It’s interesting to see how quickly the ocean of liquidity can make people forget.