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First with Financial Comment from Arabia

$59bn Dubai debt default risk to pull stock markets down

with 6 comments

Emerging stock markets around the world will undergo a risk reassessment after the news of a $59 billion debt payment suspension in Dubai, and a correction from current market highs looks inevitable. These overbought markets are very vulnerable to sudden shocks.

S&P told the Financial Times the Dubai decision ‘may be considered a default under our default criteria, and represents the failure of the Dubai government (not rated) to provide timely financial support to a core government-related entity.’

Eid holidays

Bond markets responded with credit spreads immediately widening. But Gulf stock markets are closed for the Eid religious holiday, and this will give the government time to clarify its intensions. Markets will likely tumble when they reopen.

The $59 billion debt mountain belongs to Dubai World whose assets range from the Jebel Ali Free Zone to the quoted ports operator DP World and Nakheel the developer of three palm-shaped islands. Two palm islands lie abandoned as well as a map of the world formed from smaller reclaimed islands.

At the same time as the debt repayment suspension, the government appointed Deloitte’s Aidan Birkett as Chief Restructuring Officer to ‘oversee the restructuring process and ensure the continuity of Dubai World’s operations’. His report will be eagerly awaited by creditors who are very unhappy about the debt suspension.

Only a few weeks ago creditors were assured that the $3.5 billion Nakheel Islamic bond due in December would be repaid. Some speculators had bought the bond earlier this year at a massive discount in expectation of a huge profit that will not now transpire.

A statement said Mr Birkett ‘will start to assess and evaluate the extent of the restructuring required. As a first step, Dubai World intends to ask all providers of financing to Dubai World to “stand still” and extend maturities until at least May 30, 2010’.

But Dubai is not alone in its debt problems. Banks have been falling over themselves to lend money to emerging markets in recent years, and since the financial crisis there has even been a view that emerging markets carry less risk than developed countries.

Carry trade risk

The carry trade of borrowing in US dollars and investing in emerging markets for high returns is a liquidity bubble and an accident just waiting to happen. Perhaps the situation in Dubai should be regarded as a wake-up call.

Investor perception of stock market risk has just hit a five-year low in the United States. Any contrarian investor would have to conclude that such monstrous complacency could only come before a market crash, as indeed it did last autumn.

Shocks in emerging markets like Dubai are the flutter of butterfly wings that produce a hurricane elsewhere, and $59 billion is a bit more than a butterfly. Investors should exit all stock markets and buy bonds or precious metals or short emerging markets. Gold hit $1,195 as this article was written.

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Written by Peter Cooper

November 26, 2009 at 8:16 am

6 Responses

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  1. Dubai became the Gulf’s biggest credit crunch victim a year ago. But its ruler, Sheik Mohammed bin Rashid Al-Maktoum, had continually dismissed concerns over the city-state’s liquidity and claims it overreached during the good times.

    When asked about the debt, he confidently assured reporters in a rare meeting two months ago that “we are all right” and “we are not worried,” leaving details of a recovery plan — if such a plan exists — to everyone’s guess.

    Then, earlier this month, he told Dubai’s critics to “shut up.”

    “He needs to produce a recovery plan that will be respected by those who want to do business with Dubai,” said Simon Henderson, a Gulf and energy specialist at the Washington Institute for Near East Policy. “If he does not do it right, Dubai will be a sad place.”

    Tom

    November 27, 2009 at 2:11 am

  2. Yep!

    As Rupert stated, “Friday trading gonna be interesting.”

    Also interesting is the fact that, although Thursday is a US holiday, the Wall St. Banksters (particularly JPM and GS) are working overtime to “contain the problem.” One can only guess what tricks they have already employed, and what traps they have set for Friday trading.

    obewon

    November 26, 2009 at 9:07 pm

  3. PR agency? They’re probably working full out but turd polish can only do so much. How do you put a good spin on this?

    Three things are now abundantly clear:

    1. The people running Dubai didn’t have a clue despite being lorded as geniuses – it was all debt fuelled folly

    2. The information coming from the Dubai government cannot be trusted (most of us realised this a long time ago)

    3. Abu Dhabi won’t automatically act as backstop for Dubai and underwrite all its nonsense.

    The only thing that keeps the UAE afloat is oil. Everything else is just vanity projects. When the oil runs out, this patch of desert won’t be able to support 200,000 people, let alone 5 million. What they need urgently is to reduce expectations of locals, stop their glorious welfare state, encouraging a work ethic and hope that in 20 years they have a new generation of hard working people ready to do all jobs the country has. Otherwise the UAE is going the way of Nauru. The parallels are there for all to see.

    Flack

    November 26, 2009 at 10:57 am

  4. Goes to show you, if you don’t have a whole lot of oil, don’t spend money like you do. Were they trained by Wall Street banksters or Washington politicians, the kings of dangerous levels of debt creation?

    Ed Note: Bill – how much additional credit do you think Dubai has now? And what will it cost? Even governments can not borrow forever, and I wonder if complacent investors in the US have thought what this means – bailouts are coming to an end…

    Bill Simpson in Slidell

    November 26, 2009 at 10:09 am

  5. Question:
    If nakheel defaults on it’s bond repayments and they are held by local banks/holders – do the executive/board get arrested?
    Or will the parent Co execs/board be on the hook?
    Or how about the owners of the company?

    Isn’t that what happens if you default or bounce a check in the UAE?

    Ed Note: You are personally liable for a check, a limited liability company is different! But I think you will find heads will probably roll in this affair.

    sandman

    November 26, 2009 at 9:56 am

  6. Those who purchased Nakheel 2009, on open-market, in February, must be praying that this will not go underwater, as all Istithmar overseas investments seem to have done.

    I thought a Western PR company had been retained to advise on how Dubai should handle these matters?

    Where are they now, as this announcement reverberates around the International Financial Community, which does not close for Eid?

    Friday trading will be interesting as USA re-opens post Thanksgiving!

    Rupert Neil Bumfrey

    November 26, 2009 at 9:34 am


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