Posted by LWM Team on Thu, Feb 11, 2010
In the 21st century, financial institutions have become connected on a global basis and intercontinental lending has become the regular mode of operation. One has to pause and take a look at what this means for our global economy. Is it possible that a second recession is around the corner?
The drawback of intercontinental lending is that many of the local safeguards that are used to secure against risky loans no longer come into play. It is much more difficult to check on the health of a loan made across an ocean than it is to check on a loan that is made to a local business. For this reason it is not uncommon to see a large buildup of risky loans that, if allowed to default, can have a catastrophic domino effect triggering a second recession.
Dubai is perhaps the poster child of how this risky lending could very easily trigger a second recession. Known as a desert oasis for the rich and powerful, Dubai is also one of the largest recipients of risky international loans created by banks hoping to receive a large payout.
For all its glitz and glamour Dubai is nothing more than a house of cards held together by international loans. Unlike the other Emirates, Dubai does not have large oil reserves to fall back on should its tourism business ever fade. This poses a problem when all its magnificent, over-the-top, attractions are built using risky loans.
Should the tourism (both corporate and vacation) ever face a setback, Dubai will find itself unable to repay its international loans, which will lead to a domino effect that could very well trigger a second recession worldwide. Long sotry short? Tax relief will be the least of your worries. For as obvious a case as Dubai may be, there are many other instances of huge poorly conceived international loans that could have much the same effect.