Stocks plunge! The yen crashes! Crude oil slides down!  Investors flee to the safety of the U.S. Treasury. The world's economic establishment is taken by surprise (an exogenous shock) as the Dubai emirate suddenly decides to deal differently with its debt. . On a broad level, one would assume that if Dubai could have handled its debt problems privately, it would have -- and the mere fact that it could not justifies the fears that are moving the markets.

High-flying Dubai wasn't supposed to default this way (although why that magical supposition existed is beyond my ken).  Countries aren't supposed to change the rules (but they'll do it if they need to do it to survive, as investors in this country found out earlier this year.)   Of course, countries that don't have natural resources (Dubai didn't have much oil itself) and were ridiculously overdeveloped aren't supposed to weather a global recession.

The New York Times calls Dubai's move "the global high-finance equivalent of a homeowner asking the bank to allow six months of skipped mortgage payments because of a shortage of cash."  An analyst blithely points out that Dubai's debt restructuring won't be nearly as difficult to recover from as the prospect of, say, the commercial real estate market collapsing in the U.S. The point, though, is that this global kluge of an economy isn't strong enough to simply notice something like this and move on. 

The good news seems to be that the prospect for a cataclysm is slight because Dubai's finance woes were known -- even sort of priced in -- though credit rating agencies appeared not to agree, and Dubai's ruler itself told carpers to "shut up" earlier this month. Now,  writes the Financial Times's Roula Khalaf:

Perhaps Dubai is convinced that as the government of the emirate raises fresh funds and restructures companies related to it, the emirate is consolidating its creditworthiness. Farouk Soussa of Standard & Poor's says that lending to the government now arguably becomes less risky because it is putting the funds to better use. But he also says this is cancelled out by the lack of transparency.

Must reads about Dubai include Brad Delong's content, CreditWriteDowns, and Marginal Revolution.

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