Thispaper is about Dubai. It discusses Dubai’s debt, development andcrisis.
Whatshould Sheikh Maktoum and the Dubai’s Supreme Fiscal Committee doabout the debt of Dubai World?
Theyneed to restructure the debt. Usually, debt restructuring is usedwhen an entity is experiencing tough economic times. This does notmean that the entity cannot settle the debt but it implies that givenmore time the entity can restructure a number of operations that willhelp it to settle the debt. There are other options that can bepursued but debt restructuring seems to be the most appealing(Musacchio, Goodman, Qureshi, 2012). Some other options can includebailout but they are very costly to the citizens since InternationalMonetary Fund always takes part when bailing a country.
Debtrestructuring is the only way that will guarantee success of thecountry’s economic development. When a country is in experiencingfinancial distress it can get temporary legal protection when itstopped servicing its debt. In return, the country would have tonegotiate with the creditors (Musacchio, Goodman, Qureshi, 2012). Itslenders will then get incentive to give novel working capital” byoffering another debt seniority over the old one. Small creditors cango with organization plan when creditors agree. Sovereign bankruptcyis enticing since it can do away with need for IMF bailouts whileevading legal quagmire of the unilateral default. Both debtors andcreditors stand to gain from clear rules regarding procedure fromrestructuring debts when the rules balanced rights of creditors anddebtors. Guaranteeing the debt could be another option. Thegovernment needs to have confidence of its creditors and this canonly be attained by it guaranteeing the debt since they still needthe creditor’s confidence to ensure that they run their operationssmoothly.
Asan investor, would you have sold your bonds before Dec. 2009?
Asprudent investor I would not sell my bonds. The logic behind this canbe attributed to the analogy of having a sharp pencil that has aneraser on one of its end. The sharp end can be considered to beinterest rates while the eraser is the bond prices, when eitherincreases, the other declines. The sharp end in the pencil will beused until a point will reach that it cannot be used anymoretherefore the point in which there is an eraser will be reached andthis will be used to rub the writing (Musacchio, Goodman, Qureshi,2012). Therefore, this implies that at this point there will be gainsin the value of bonds and many investors will start buying with thespeculations that the value of the bonds will rise considerably(Musacchio, Goodman, Qureshi, 2012). Even though the value of bondswill decline considerably, it will reach a point that the value willrise considerably since many people are likely to sell their bondswith the fear that they are likely to lose when they continueholding. As an investor one should have a foresight since the valuethe bonds is likely to increase in future.
Usually,when interest rates are low it means that bond prices are very highand this implies that bonds are not paying enough interest(Musacchio, Goodman, Qureshi, 2012). Additionally, interest rates arelikely to rise in future. When this occurs, the bond prices willdecline.
Musacchio,A., Goodman, A., Qureshi, C., 2012. Dubai: Debt, development andcrisis (A).