Dubai seeking to suspend repayments on all or part of its $59 billion in debt.

[HAIDER]

BusinessWeek compiles comments from Wall Street economists and strategists on Nov. 27 on the aftershocks from Dubai World’s Nov. 25 announcement that it is seeking to suspend repayments on all or part of its $59 billion in debt.

Win Thin, Brown Brothers Harriman

We stress again that the current troubles being seen in Dubai are a direct result of its efforts to tie its fortunes to global real estate, tourism, and services, and are particularly unique to Dubai and should not have wider implications for sovereign emerging markets (EM) risk. The property boom helped this strategy work in the good times, but the popping of the global real estate market has put severe strains on Dubai. Developments in Dubai should thus be seen in the context of the entire country basically being geared towards real estate development and not in the context of EM sovereign risk and fundamentals. Thus, while the current period of risk-off trading could yet persist, longer-term investors should be looking for buying opportunities in EM during this correction.

What is making things so difficult for Dubai World is not just that the domestic real estate market has collapsed. Rather, it’s the fact that there is no safe haven for the company. Its operations are worldwide (which should imply some sort of geographical diversification) but they are concentrated in property and real estate development. Every country is undergoing a painful recession and/or deep correction in the property market, so Dubai World is simply getting squeezed in all of its investments. The fact that it is a quasi-sovereign muddies up the water a bit, but we stress again that Dubai’s woes should not reflect badly on most other EM credits, which we believe remain sound and on an improving path.

We have stressed time and again that conditions are moving away from investors simply piling into all risk assets in liquidity-driven trades and towards investors becoming much more selective in fundamentally-driven trades. This will require more homework on the part of global investors, but we believe profitable opportunities in EM investing still exist.

Vassili Serebriakov, Wells Fargo

News that Dubai’s flagship government-owned holding company was looking to delay debt payments has shaken financial markets, sending global equity indices sharply lower. The Japanese yen is the main beneficiary, surging to a 14-year high against the dollar. In turn, the greenback is up against virtually every other currency, and in particular against commodity and emerging market currencies.

Staff economists, Action Economics

Credit-default swap (CDS) spreads knee jerked wider, not surprisingly, on Nov. 27 in the wake of the Dubai World news, as the rising threat of default on their bonds increased protection costs around the world. The Markit CDX North American investment grade index jumped 7 basis points to 109, the highest in two months.

But, emerging market spreads were over two times wider as collateral damage to that region is more worrisome. CDS contracts on Qatar debt widened 15 basis points to 129 basis points, while the cost to protect Abu Dhabi debt jumped 24 basis points to 184 basis points. Malaysian CDS widened 13 basis points to 117. The Emirates Bank credit default swap rate is out nearly 300 basis points wider at 289 basis points.

Dubai Holding Co.’s CDS climbed 290 basis points to 1,155 basis points. DP World, the largest port operator in the Mideast, surged 201 basis points to 810 basis points (a 12% upfront fee is also required).
Experts Weigh In on Dubai Debt Crisis - BusinessWeek

 

[HAIDER]

Stocks slide on fears about Dubai debt fallout
11/27/09 12:01 EST

NEW YORK -Stocks are tumbling as fear sweeps world markets that financial trouble in the Middle Eastern city-state of Dubai will upend a global economic recovery.

The market is off its worst levels Friday as European stocks rebounded from earlier losses. Trading has been erratic during the shortened session. The market closes three hours early, at 1 p.m. EST.

Treasury prices are higher as the dollar rises against other major currencies. Commodities prices are down sharply.

At midday, the Dow Jones industrial average is down 125 at 10,338. The Standard & Poor's 500 index is down 15 at 1,096. The Nasdaq composite index is down 26 at 2,150.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

NEW YORK (AP) — Stocks skidded Friday as fear swept world markets that financial trouble in the Middle Eastern city-state of Dubai will upend a global economic recovery.

Major stock indexes fell more than 1 percent from 13-month highs, including the Dow Jones industrial average, which is down 125 points in a shortened trading day.

Stocks pulled off their worst levels but 10 stocks still fell for every one that rose at the New York Stock Exchange and all 30 stocks that make up the Dow fell.

Trading volume had been expected to be weak after the Thanksgiving holiday. Light trading can intensify swings in the market. Stock markets close three hours early, at 1 p.m. EST. Bond markets close at 2 p.m.

Investors' broad retreat from riskier assets pushed Treasury prices higher. The dollar gained against most other major currencies as investors sought safety following steep drops in overseas markets. Commodities prices tumbled.

Investors are worried that a default by a government investment company in Dubai over $60 billion in debt payments could have a ripple effect in world financial markets. The fear is that losses in the small emirate, which has drawn wealthy tourists from around the globe in the past decade with its Las Vegas-in-the-Middle East appeal, could imperil a nascent economic rebound.

Worries about bad debt are fresh in investors' minds after the collapse of the U.S. brokerage Lehman Brothers in September last year pushed the world overnight deeper into recession as banks halted lending on fears of a domino effect of bad loans.

"I think this is a sign of things to come," said Dave Rovelli, managing director of trading at brokerage Canaccord Adams in New York. "Commercial real estate continues to go lower. People are going to continue to default on debt payments."

Investors are being forced to ask whether the troubles in Dubai will usher in a new period of financial instability and put in danger an eight-month rally in the stock market. However, the ability of world markets to digest the troubles in Dubai without widespread panic could also boost investor confidence in the recovery in the financial markets in the past year.

The latest trouble on Wall Street comes as the U.S. kicks off the unofficial start to the holiday shopping season. Investors will be tracking news from retailers for insights into how much consumers will spend in the coming month. Consumer spending is the biggest driver of the U.S. economy.

In late morning trading, the Dow Jones industrial average fell 125.91, or 1.2 percent, to 10,338.49, after falling as much as 233 points in the first minutes of trading.

The broader Standard & Poor's 500 index fell 14.45, or 1.3 percent, to 1,096.18, and the Nasdaq composite index fell 26.28, or 1.2 percent, to 2,149.77.

Energy, materials and financial stocks posted some of the biggest losses as commodities fell and investors worried about bank balance sheets.

Investors pushed into the safety of U.S. government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.24 percent from 3.28 percent late Wednesday. The yield on the three-month T-bill, which is considered one of the safest investments, was flat at 0.03 percent.

The ICE Futures U.S. dollar index, which measures the greenback against a basket of foreign currencies, rose 0.4 percent.

Commodities, which are priced in dollars, fell as the dollar gained. The move reflected an unwinding of trades that relied on a weak dollar to finance purchases of higher-yielding assets. Spooked traders reversing the so-called "carry trade" were demanding safe-haven assets.

Investors have been pushing into riskier assets for months as they seek higher returns. U.S. interest rates are at record lows, making riskier investments like stocks an enticing alternative to the paltry earnings of safer investments like government debt.

Crude oil fell $3.23 to $74.73 on the New York Mercantile Exchange. Gold fell.

European markets, which fell more than 3 percent Thursday, turned higher after an early slide Friday. In afternoon trading, Britain's FTSE 100 rose 0.2 percent, Germany's DAX index rose 0.3 percent and France's CAC-40 advanced 0.5 percent.

In Asia, Japan's Nikkei stock average slid 3.2 percent. Hong Kong's Hang Seng index tumbled 4.8 percent. South Korea's benchmark dropped 4.7 percent.

Kevin Shacknofsky, portfolio manager of the Alpine Dynamic Dividend Fund in Purchase, N.Y., said the reaction and calming of currency markets and the rebound in Europe was a signal investors are taking Dubai's problems in stride.

"The currency markets and the European markets are telling us that this not as bad as initially thought," he said.

The worries about Dubai erupted amid a period of relative calm in U.S. markets. The Chicago Board Options Exchange's Volatility Index, known as the market's fear index, rose more than 2 percent to 23.18. On Wednesday it fell to its lowest level since August 2008. That signaled investors hadn't been worried about big swings in the market.

The historical average of the VIX, as it's known, is 18 to 20. It jumped to a record 89.5 in October last year around the height of the financial crisis.

The latest test of the market comes as major stock indicators had been up by more than 6 percent this month after stalling last month on worries about the economy. The S&P 500 index is up 64.2 percent from a 12-year low in March.

Trading volume in November has been light as many professional investors have pulled back from markets in hopes of locking in the big gains for 2009.

Rovelli said investors have been too quick to assume that the financial markets are on the mend.

"We're way ahead of ourselves in this market. We're in the eye of the storm now and we've been in it since March," he said. "Now we're in the back end of the storm."

Volume on the New York Stock Exchange came to 299.5 million shares compared with 232.9 million shares traded at the same point Wednesday.

The Russell 2000 index of smaller companies fell 7.96, or 1.3 percent, to 584.23.
Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

 

[Hutchroy]

UAE faces up to $184bn total debt: BofA-Merrill Lynch

LONDON: The United Arab Emirates (UAE) has total debt amounting to $184 billion at the end of 2009, according to estimates by Bank of America-Merrill Lynch, which said the region faces a heavy redemption schedule until 2013.

Dubai’s shock announcement this week that it is seeking to suspend payments on debt of its state-owned conglomerate Dubai World and property subsidiary Nakheel has roiled global markets, raising fears that the emirate which funded a spectacular building boom on a mountain of debt could default.

BofA-Merrill Lynch said in a report that the restructuring undertaken by Dubai would be a serious blow to the Gulf region’s economic recovery prospects, adding that the scale of the region’s debt was now the issue.

“The lack of official debt data may add up to uncertainty and cause higher risk premiums,” it said. Of the $184 billion UAE debt, Dubai holds $88 billion while Abu Dhabi accounts for $90 billion. BofA-Merrill Lynch said the debt servicing cost will be higher than these estimates as their numbers only include the principal payments.

The bank said Dubai faces almost $50 billion of debt amortisation in the next three years : $12 billion in 2010, $19 billion in 2011 and $18 billion in 2012. “We estimate the total debt for Dubai World as $26.5 billion, 80 per cent of which needs to be paid back in the next three years,” added BofA-Merrill.