'World can get along without Dubai'

What should Yossi Investor do following Dubai World's debt moratorium last Wednesday? First of all, learn the facts (no, Dubai's economy isn't based on oil) and put the crisis into proportion, urges Clal Finance's macro analyst Amir Kahanovich.

On Wednesday the government company Dubai World suspended service of its $59 billion debt for six months, sending world markets into a tizzy. Equities had been climbing strongly in most markets as investors began to lose their fear of risk: Dubai's sudden announcement sent shudders down spines worldwide.

Hearing the news reminded laymen investors of other momentous crashes: Lehman Brothers, Iceland, even past crises in Russia and Argentina, says Kahanovich. Because of its gigantic developments and the involvement by banking behemoths such as Citigroup, Barclays and HSBC, Dubai must be pretty central to the global economy, Joe Investor might feel.

But Kahanovich points out that the fall of even giant companies or whole countries doesn't turn trends for long unless they cause fundamental change. Lehman's collapse clogged the arteries of global finance but the seaside emirate is no clot in the system. It isn't even a straw breaking a camel's back, he says.

"The world can get along without it," Kahanovich concludes. The global economy didn't fall because of Lehman, but because of the subprime-mortgage mess coupled with property and credit bubbles.

Two years ago debt of $59 billion might have impressed. "Today it looks like America's pocket money," and also, the sheikhs have assets they could sell, writes Kahanovich.

Dubai's trouble could trigger a wider problem, to be sure. Kahanovich's worst-case scenario involves a true default triggering another credit crunch and investors fleeing for safe harbor, but he doesn't think that likely. One upshot, he notes, is that investors traditionally sought safe harbor in government bonds from the stormy waters of corporate bonds. Today corporate bonds may prove to be the safer bet.