Bank Rates May Waver As Dubai Crisis Plays Out

Traditionally, the Friday after Thanksgiving is one of the quietest and calmest of the year in the U.S. financial markets. Not this year. News that Dubai was looking to delay payment on $60 billion in debts rocked the stock market and sent bond yields lower.

This drama will probably play out in multiple installments, as Dubai’s efforts to restructure its debt and the broader effect on the world banking system are sorted out in the days ahead. Meanwhile, for U.S. bank depositors, it is one more reminder that even the most conservative accounts can sometimes be touched by seemingly unrelated events.

How can a default in Dubai affect U.S. bank depositors? There are a few possible ways:

With the financial system still somewhat fragile after its extreme difficulties last year, it remains to be seen whether this default could trigger another crisis. The immediate reassurances that U.S. banks have little investment in Dubai debt ring hollow. The inter-connectivity of the world’s large financial institutions was made crystal clear last year.
If the trouble in Dubai sets off another wave of global economic weakness, bank rates could slip even lower. The initial response of the bond market on Friday was to send interest rates lower, which is the classic reaction to economic weakness.
In contrast to the reflexive reaction of bank rates heading lower, at some point another credit crisis could actually mean higher savings account rates, money market rates, and CD rates. If liquidity around the world tightens yet again, it could be argued that people with capital, like bank depositors, should be able to demand more of a reward for that precious commodity.

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