Saturday, November 28, 2009

Dubai Debt Problem is covered by news services

Thanks to Doug Noland for posting these and more on Safe Haven. I am making no conclusion from these. If any readers do, please leave a comment. The size of the problem seems to be hidden. If it is $90 billion or less, then my guess is that it will be contained with not too much destruction to other investors, thanks to Abu Dhabi. The real danger is if the news caused too many people to panic. The economic recovery is balanced on a pin head and it won't take a lot to knock it off. So my, and yours I'm sure, question is... will this be big enough? I'm going to watch for news on the banks in Britain for signs they are unable to take on new stress.

November 27 - Zawya Dow Jones (Andrew Critchlow and Oliver Klaus): "Pressure mounted Friday on oil-rich Abu Dhabi to step in with financial support for Dubai after fears of a debt default by one of its state-owned conglomerates hit stock markets in Asia and Europe. 'Abu Dhabi's support for Dubai might be less generous than the markets have assumed so far. Perhaps Abu Dhabi has forced Dubai to tackle the problem of excessive corporate debt 'in-house' first before extending more financial support,' Swiss lender UBS AG said... Persons close to the Abu Dhabi government told Zawya Dow Jones Friday that the United Arab Emirates as a whole won't allow Dubai to be crushed by the problems of its troubled business conglomerate Dubai World. The company, which has $60 billion of total liabilities, is seeking a debt standstill amid problems at its real estate and investment units Nakheel and Istithmar World. Abu Dhabi helped Dubai in February through the Central Bank of the U.A.E., which bought $10 billion of emergency bonds for the emirate. Abu Dhabi banks majority-owned by the government this week bought another $5 billion of Dubai sovereign debt. The U.A.E. is a federation of seven sheikdoms including Abu Dhabi and Dubai. Abu Dhabi is the senior partner in the grouping and controls 90% of its vast oil reserves, considered to by the world's fifth largest."

November 27 - Bloomberg (Lester Pimentel): "Dubai's debt woes may worsen to become a 'major sovereign default' that roils developing nations and cuts off capital flows to emerging markets, Bank of America Corp. said. 'One cannot rule out -- as a tail risk -- a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s,' Bank of America strategists Benoit Anne and Daniel Tenengauzer wrote..."

November 27 - Bloomberg (John Kohut): "British banks have the most loans outstanding to the United Arab Emirates in Europe, constituting $49.5 billion of a total of $87.3 billion extended by the continent's lenders to the Gulf country as of June 2009, Royal Bank of Scotland Group Plc said..."

November 27 - Wall Street Journal (Stefania Bianchi): "Dubai's fragile real-estate market could suffer another collapse in prices after the city-state asked for a standstill on Dubai World's debt and its struggling real-estate unit Nakheel. 'Should they effectively default, it can become one of the biggest sovereign defaults since the Argentinean crisis,' said Marina Akopian, partner at HEXAM Capital... 'It will certainly have a very negative impact on the Dubai property market and I suspect on property markets globally.' ...An estimated 50% has been wiped off the average price of real estate in the emirate since its peak... Earlier this month, UBS said Dubai property prices could drop a further 30% over the next 18 months and may take at least 10 years to recover... 'This type of crisis brings fundamental weaknesses to the surface faster. This could play out in the next six months or so," he said. UBS said one of the biggest concerns for Dubai real estate is the "funding gap" to finish properties that are already started and on which investors are defaulting. The bank estimates that $11 billion is needed to complete an expected 40,000 residential units by the end of 2010.

November 27 - Reuters: "Abu Dhabi Commercial Bank has at least 8-9 billion dirhams ($2.18-$2.45 billion) exposure to Dubai World and related entities, which will require the bank to book more provisions, an senior executive of the bank said. 'We have to face the stress that will be caused to our balance sheet and profit and loss account due to this exposure to Dubai World and associated companies because it is a default,' the executive, who declined to be named, told Reuters..."

November 27 - Wall Street Journal (Chip Cummins in Dubai and Dana Cimilluca and Sara Schaefer Munoz): "Investors sold banking stocks across Europe and Asia and jacked up the price of insuring against Dubai defaults, a day after the government said it would take charge of restructuring its corporate flagship, Dubai World, and asked creditors to accept delayed payments. A... six-month standstill in debt payments took investors and analysts by surprise. It followed months of positive moves and comments from government officials suggesting Dubai and the federal government of the United Arab Emirates were willing to step in to plug financing holes. 'The most negative effect of [the] announcement is a major shock to confidence in the U.A.E. and the region more generally,' said Richard Fox, a credit analyst at Fitch... 'People will now question government support.'"

November 27 - UK Telegraph: "Let's be generous here. Maybe Dubai was just trying to set another record. It's already given us the biggest building, biggest indoor ski slope, biggest shopping mall and biggest theme park. Surely, it was only a matter of time before it went for another biggie: the biggest debt-market cock-up. Just have a squint at the planning that went into this one. Here's the latest from Sheikh Ahmed bin Saeed Al-Maktoum. 'Our intervention in Dubai World was carefully planned and reflects its specific financial position,' declared the chairman of the grandly titled Supreme Fiscal Committee. 'The government is spearheading the restructuring of this commercial operation in the full knowledge of how the markets would react.' Sadly, the Sheikh did not spell out all the careful planning that went on."

November 27 - Bloomberg (Francois De Beaupuy): "French Prime Minister Francois Fillon said Dubai's request to reschedule debt repayments shows the global financial crisis "is not over" and that stimulus efforts must be maintained to avoid "breaking the weak recovery.'"