Contagion risk (non-flu version)

Business reporters fell over each other today in an effort to categorize the impact of Dubai’s announcement that it was implementing a six-month “stand-still” on the debt of the real estate arm of its conglomerate Dubai World, essentially asking debtholders to hold onto bonds past maturity. Complicating the efforts of reporters to put the story into context was the fact that it is both American Thanksgiving and Eid Al-Adha in the Gulf, leading to an unusual absence of groupthink. So the shock of the Dubai default is either:

a. Similar to the Russian government’s default on its GKOs (short-term T-bills) in 1998, which led to the collapse of Long-Term Capital Management and — in retrospect — relatively short-lived market turmoil;
b. Akin to the Panic of 1907 (not really)
c. The Great Recession’s Creditanstalt, dragging Europe from its half-hearted recession into full-blown depression.

The ultimate effect won’t be clear for a while. (A conference call scheduled for today had to be cancelled because the phone lines were overwhelmed with worried investors, which didn’t help in soothing concerns.) There’s speculation Dubai could be forced to sell assets, such as major pieces of London real estate, to raise cash, which would certainly shake things up. British and European investors have by far the most exposure.