Liquidity Ain't Solvency

So Dubai seems to be getting a restructuring of around $26 billion in debt. And all is well in Dubai World. Then again, think about it. Don't just think about the life line and how a major financial event was avoided, think about how in the world (Dubai World if you like) they will turn their financial center with man-made islands, massive sky scrappers and condos to the horizon into a financial success that can pay off $80 billion in debt over the years to come.

While you are chewing on that, imagine you are well-to-do financial institution or corporation (I did say imagine) that is looking to invest a bunch of money in a new HQ or financial center. If you had this financial freedom in today's economy, and I say if, would you go and buy space in Dubai World, which nearly just went belly up. Seriously, who is going to buy this stuff, especially with so many cheap opportunities out there.

And so you can give someone on death row a temporary reprieve while someone considers their appeal but it does not mean the end is any rosier. Dubai World in the end likely has no way to pay off this debt. They built their own demise. I foresee some day, years from now, all those man-made islands being reclaimed by the sea, as they should be. They should know better than to fool with Mother Nature. Don't believe me, go to Sudden Debt to get his read on the situation - liquidity does not equal solvency.

Many would argue we have just been masking our problems hoping that time will allow institutions to financially recover. I guess it is possible for us to outlive our problems but what happens if we run out of time before we run out of money? Do you think we will have the time to outlive our debts? Do you believe in miracles? If you do, I have a man-made island to sell you.

Disclosures: none.