By John Newsome on 26th February 2010

It's our view that the world economy is still concealing plenty of unexploded ordnance. Whether it detonates is another matter but every now and again we get a reminder that all is not as well as some would want us to believe. Greece has been the latest member of the Eurozone to feel the heat as fears grow that a default on its sovereign debt is not out of the question. We've suggested previously that the fault lines of the Euro would reveal themselves in the performance of the highly indebted smaller countries, once described as being on Europe's periphery.

Of course, despite having a common currency, there's a reason why Greece has to pay 2% points more than Germany to borrow money. It possesses a mountain of debt; higher than Demis Roussos's voice, wider than his kaftan and it will take Forever and Ever to pay off. Bond rating agencies were also caught on the hop. In yet another example of delaying the bolting of a stable door that even Shergar could have escaped from, they belatedly downgraded Greek debt by a substantial margin to reflect the danger that had, in reality, been building for years.

It remains to be seen what happens but Greece's budget deficit is running at 13% of GDP. EU rules state this should be no more than 3% while member states are prevented from lending to one another to plug deficits. We'll continue to keep an eye on Greece; not because it's a particularly important economy but because it represents just another weak point in a global financial system that is being held together with sticky tape.

Which, appropriately, brings us to Dubai where things really are looking desperate. Property prices have halved and late last year, Dubai World, the holding company that overseas numerous government owned enterprises, announced it may not be able to meet payments on $22bn of debt. Needless to say, this caused panic; not only among investors who had incorrectly assumed that Dubai World debt carried a government guarantee but also ratings agencies that, once again, scrambled to downgrade long after it would have been useful to do so.

To our eyes, Dubai represents another casualty of the bubble era; a combination of too much debt, excessive speculation and unrealistic expectations. But then, an economy reliant upon bling, vanity construction projects and flogging artificial islands to denizens of celebrity magazines had, perhaps, long since lost touch with reality. The 'Dubai' branded credit card will probably never happen but just in case it does... seven star hotel? $650m; man-made islands? $12bn; potentially defaulting on $22bn of outstanding debt? Priceless.

John Newsome can be contacted on:
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