IS DUBAI A Financial China Syndrome? Beats me. On the one hand, if rich Arab sheikdoms can go broke, who’s safe? On the other hand, anyone can spend more than they should, and stupidly — and people with lots of money may even be at more risk for that. So does it tell us anything about the state of other sovereign debtors? Doubtful. Will it bring down the system itself? Also doubtful, but who knows?

UPDATE: A hedge-fund reader emails:

Dubai could be bailed out its by its Arab pals in the blink of an eye. This is about WILLINGNESS to pay, not ABILITY to pay.

The public list of Western bank exposures shows some institutions are wounded, but not mortally so.

The big financial enterprise at stake here is the recently created industry known as “Islamic Finance” which purports to create debt instruments consistent with arcane Moslem-friendly rules.

No one knows, or CAN know, how these spanking-new pieces of paper will be honored or valued. And only insiders know who holds the paper, and what process will be used to manage their first crisis.

Given the obvious conspiracy to spring this de facto default on markets before a lengthy Islamic holiday, it’s clear this will be very much an insiders’ game.

A worst case outcome, structurally, would be the collapse of the entire Islamic Finance complex, with unknowable consequences. At the very least we’d be looking at another drain on global liquidity/financing capability, at the margin dampening global growth further and pushing the US recovery further into the future.

Interesting. Well, stay tuned . . . .