Thursday, November 26, 2009 0 comments ++[ CLICK TO COMMENT ]++

Final chapter in the Dubai saga - Default

This is the final chapter in the Dubai story. The ending is pretty similar to all other bubbles: default. If Dubai defaults, it will also be the first major sovereign default in a while. MarketWatch reports:

Fears of a potential default in Dubai sent shock waves through financial markets Thursday, weighing on European and Asian equities, lifting government bond prices and pulling the U.S. dollar off of recent lows as investors sought out safe havens.

Dubai late Wednesday said it would restructure Dubai World and announced a six-month "standstill" on repayments of the state-run wide-ranging conglomerate's debt. Ports operator DP World and its debt is excluded from the standstill plan. Read about Dubai World's sprawling empire.

Analysts said Dubai's woes were a blow to sentiment, serving as a reminder that potential trouble spots remain in the world economy.

"I don't see this as a massive issue but it's another warning to where the world got itself last year with loose monetary conditions [and] loose lending," said Naeem Wahid, market strategist at Lloyds TSB. "And, in a few cases, the problems are still out there and we could continue to see these kinds of nasty surprises" in the future.

Government-owned Dubai World is a conglomerate with interests in real estate, ports and the leisure industry. The firm carries around $60 billion in liabilities. Credit agencies Moody's Investors Service and Standard & Poor's downgraded the debt of a range of government-related firms, including DP World, after the restructuring announcement, news reports said.

This always begs the question, who are the losers? Well, the big loser would be the government of Dubai and its autocratic ruler. It appears that UAE will now be calling the shots over Dubai. Apart from that, Middle Eastern banks may take big losses. It also seems that European banks are exposed:

European banks could have as much as $40 billion of exposure to Dubai after helping to arrange a string of bonds and loans linked to the Middle East city-state, according to analysts at Credit Suisse.

The broker said it's identified $10 billion of bonds issued by the government's Dubai World investment vehicle just since 2005, along with a further $26 billion of syndicated loans.

The key thing to remember is that the cited numbers are likely to be maximum exposure. It also does not mean that is the same thing as a loss because there will be recoveries on the bonds and loans. In all likelihood the banks have unloaded a big chunk of them off to smart money (aka wealthy investors, pension funds, hedge funds, etc.) The cited article suggests that banks retain 10% to 15% of the underwritten securities but that may be hedged. I don't think the losses will be significant for the European banks.

This is probably my last post on Dubai for a while. The ending was clear when I wrote my first post on Dubai a few years ago. (I hope I am wrong but if China is indeed furthering a real estate bubble as I believe, the end will be similar to here—except the losses will overwhelm anyone that is even remotely exposed.)


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