US also has it’s own vast overbuilding of commercial real estate that is sitting VACANT.

Dubai World owners were caught up in the same heady debt-fueled commercial construction-binge that swept across the United States. The problem can be traced back to lax lending standards and low interest rates. Now demand has fallen off a cliff and credit is getting tighter. Dubai World can’t roll over its debt or meet its obligations. That’s what typically happens when credit bubbles burst.

On Thursday, Bank of America analysts issued a statement: “One cannot rule out — as a tail-risk — a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s.”

First, it illustrates that the financial crisis is not over—households, businesses and countries are still deleveraging. This ongoing process will slow spending and increase defaults, bankruptcies and foreclosures. Government guarantees and stimulus programs will not reverse prevailing trends. More incidents like Dubai World should be expected. These “credit events” will disrupt the recovery and spur greater risk-aversion which will push stocks downward.

Second, when these incidents take place, there’s likely to considerable collateral damage from the unregulated insurance policies (credit default swaps) which underwrite the bonds. These CDS derivatives are not sold on a public exchange so no one knows who holds them, in what amount, or whether the issuer has sufficient capital reserves to pay off claims. We should expect a repeat of AIG over and over again (although smaller) until the system is either regulated or CDS are banned. The bottom line, is that the current financial architecture is not designed to work; it is designed to make a handful of speculators very rich. These speculators own congress, the White House and the financial media, which is why there has been no meaningful change in regulations.

Unlike Dubai, the banks in the US have a fertile ground of depositers that they can sibsidize these losses with by fees and exorbinant interest rates. And then if that fails they can just change the rules and ask for even more accounting lienience or ask the Federal Reserve to buy up the debt or backstop it in case they don’t want to monetize it by taking bank risk and transerring it to the taxpayer.

All in all, Dubai’s situation is more transparent because it’s less corrupt.

- Kil Woong