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What the Treasury can learn from Dubai

Felix Salmon is cheered by the precedent coming out of Dubai:

Personally, I’m quite happy about this default, since it sets another very useful precedent of a state-owned company defaulting on its debt. Historically investors in state-owned companies have perceived an implicit sovereign guarantee — there’s even a German word for it, Anstaltslast. The result is a huge and unhelpful moral-hazard trade.

So it’s great that the government of Dubai has made it clear that Dubai World’s lenders aren’t going to be automatically bailed out by the sovereign, despite the fact that the government has hundreds of billions of dollars in its sovereign wealth fund*. Would that Treasury will follow suit when it comes to the creditors of state-owned companies like AIG.

By Ezra Klein  |  November 30, 2009; 12:37 PM ET
Categories:  Financial Crisis  
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I agree with Felix Salmon 100%.....words I could say pretty much any day of the week, frankly.

The world's markets have digested the Dubai news fairly quickly, and moved on. Which may be a sign of nothing, but it seems like a healthy development even to a skeptic of efficient markets like me.

Posted by: zeppelin003 | November 30, 2009 1:28 PM | Report abuse

A positive precedent is finally set. Why is that the money lendors didn't see the bust coming when those of us that have none simply paid attention to the realities of the economy saw it coming a few years ago? Did they not realize that or simply not know, in the case of Dubai at the very least that majority of the worlds work force does not have the where with all to pay $700K + for vacation condo on a man made island in the desert?

Where we the working middle class that reads the papers the only ones that read WAPO and others when they said US incomes are loosing ground against the cost of living? Perhaps so...perhaps they where just blinded like our US banks where by cheap money from the fed and endless miles of CDS's, MBS's, ETF's, etc, etc. When push comes to shove positve cash flow, cash in the bank and a low DTE ratio trumps all.

Posted by: vermontbear | November 30, 2009 1:45 PM | Report abuse

If you're not going to pay off AIG's creditors, why bail out AIG at all?

Posted by: tomtildrum | November 30, 2009 4:57 PM | Report abuse

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