Except for Greece, whose credit protection trades +72 basis points wider than it did a month ago, market response to the Dubai default is surprisingly muted, as the table below from Markit Partners makes clear:

Worst Performing Sovereign Credit Default Swaps

It seems fanciful that the rest of Europe would allow Greece to default, but that is beside the point. The sharpest widening in credit default swap pricing occurred not in the soverign world, but among Japanese corporates:

The fallout was worst among Japanese builders like Kajima directly exposed to Dubai.

Abu Dhabi has already thrown a tarpaulin over its own banks to dampen contagion, and it is the tradesmen left with unpaid bills who will suffer most from Dubai’s problems–and the world will take little notice of their problems.

Far more worrying is the commercial real estate problem in the United States, the continued high rate of homeowner deliquency, the huge backlog of foreclosures–in short, the whole range of problems that stem from an effective unemployment rate (including “discouraged” and underemployed workers) of 17.5%. The cumulative effect of the popping of innumerable mini-bubbles, none of which are large enough to take down the system but all of whom together constitute a millstone around the neck of the banking system, will keep lending weak and the economy in very, very prolonged recession.

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