Via MarketWatch:

Late Wednesday, Dubai World, the city-state’s largest corporate entity, asked creditors for a six-month stay on repayment of $60 billion in debts. Asia and Europe markets sold off Thursday on the news, while the U.S. markets were closed for a holiday.

The selling resumed on Friday in Asia, with the Hang Seng Index down 4.8% and the Nikkei 225 Average down 3.2%, their worst percentage fall since March. Markets were struggling to figure out what kind of exposure banks had to Dubai debt.

Dubai is the perfect and most lavish example for the excesses of this credit-fueled era. Within the last few years, Dubai was transformed from a quiet desert town to a bustling metropolis, complete with the world’s tallest tower (at 2,600 ft, 1,000 ft taller than the Empire State Building),  the largest man-made islands, and one of the two 7-star hotels in the world. As it turns out, it was all built on a foundation of exuberance, imagination, and….extremely low interest rates, and now its time to pay it back.

Dubai, welcome to the real world.

The wave of selling hit the US markets on Friday, as the S&P 500 fell up to 2.5% in the early part of the morning:

The VIX spiked upwards by 25%, before falling back to the 24 level, after closing right above the 20 level on Wednesday:

Emerging markets and other risky trades unravelled in the course of the last two days, as many fled to the dollar as the stable safe haven that it may or may not be anymore:

So, after news of Dubai’s soon-to-be infamous credit crunch, the question now becomes: Is this renewed sense of fear and risk aversion the beginning of the end for the market run-up, or is this just another slight correction/buying opportunity for us to take advantage of? Stay tuned…..