$59 Billion Dubai Debt Default Could Have Much Wider Implications 67 comments
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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.’ 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 intentions. 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. 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. Disclosure: None
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Dow futures down 180.
the second word is the one to concentrate on ... I have no pity for them, whilst strangely enough, your wording seems to empathise ?
Funny, that this Dubai Turkey Bomb exploded on Thanksgiving Day!
"Thanks but no Thanks!" as Sarah Palin said it so well.
Another lame attempt by insiders to acquire cheap stocks, but hey it worked. I must hand it to the British this time for being so opportunistic as to play this same card on a day when the world's biggest market is closed. It's a bloody restructuring, not a default.
I somehow won't be selling my holdings today or even next week. The markets were so much better before idiots began buying stocks over the internet.
What an insane world!
I feel like another AIG-like credit default swap problem could arise pretty quickly. Given that everyone has been buy happy in the last 6 months, I feel like institutional investors might have been selling CDSs as if the world was saved and recovery was the only answer...meaning defaults would be disastrous.
I guess we'll give it a few days.
Asia & Emerging Markets have taken big hits today & Europe is now starting to slide, with the buoyant holiday mood in the US, stocks have been inflated.
Expect to see a huge sell off as people scramble to exit over extended longs. SKF could turn from a dying swan to a flying phoenix.
On Nov 27 04:47 AM bbro wrote:
> And the money will flow where??? Gold down 30 bucks....
The desperation is palpable.
Why would someone want to honor a debt obligation that is more than the value of the underlying property?
Also ask yourself the question, is the prosperity of Dubai real or artificial?
The city strikes me as artificial. It lives off the oil money, not its own services or products.
On Nov 26 09:10 PM Maha Lesch wrote:
> Over all Dubai GDP was 37 billion in 2005, at 15% growth this would
> be around 55 million by 2008. Now 16% of that number comes from real
> estate developments. that is around 9 billion. I am puzzled where
> the 50-80 billion numbers came from. Dubai income from its "little"
> oil alone is 2 billion/day. I see no fear of a default. What I see
> is probably a tactical move that was overblown out of proportions.
> Markets hate uncertainty, once more clarity is available into this
> situation, markets will surge on the same "bad" news it declined.