World – Markets crash on Dubai default fears
Dubai is shaking investor confidence across the Persian Gulf after it sought a six-month reprieve on debt payments that risked triggering the
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biggest sovereign default since Argentina in 2001. The move caused a drop on world markets on Thursday and raised questions about Dubai’s reputation as a magnet for international investment.
In Europe, the FTSE 100, Germany’s DAX and the CAC-40 in France opened sharply lower. Earlier in Asia, the Shanghai index sank 119 points, or 3.6%, in the biggest one-day fall since August 31. Hong Kong’s Hang Seng shed 1.8%. Wall Street was closed for the Thanksgiving holiday and most markets in the Middle East were silent because of a major Islamic feast.
Stocks, bonds and currencies fell across developing countries. The MSCI Emerging Markets Index of stocks dropped 1.1%, led by declines in China and Russia.
The fallout came swiftly after Wednesday’s statement that Dubai’s main development engine, Dubai World, would ask creditors for a standstill on paying back its $60 billion debt until at least May. The company’s real estate arm, Nakheel — whose projects include the palm-shaped island in the Gulf — shoulders the bulk of money due to banks, investment houses and outside development contractors.
In total, the state-backed networks nicknamed Dubai Inc are $80 billion in the red and the emirate needed a bailout earlier this year from its oil-rich neighbour Abu Dhabi, the capital of the United Arab Emirates.
“Nakheel is now standing on the brink of failure given the astonishing amount of cash Dubai would have to inject into it in order to see the enterprise survive,” said Luis Costa, emerging-market debt strategist at Commerzbank AG in London. “Events like this are a perfect storm.”
“Dubai’s standstill announcement … was vague and it remains difficult to discern whether the call for a standstill will be voluntary,” said a statement from the Eurasia Group, a Washington-based research group that assesses political and financial risk for foreign investors interested in Dubai. “If it is not, Dubai World will be going into default and that will have more serious negative repercussions for Dubai’s sovereign debt, Dubai World and market confidence in the UAE in general,” the statement added.
“There is nothing investors dislike more than this kind of event,” said Norval Loftus, the head of convertible bonds and Islamic debt at Matrix Group Ltd. in London, which manages $2.5 billion of assets including Dubai credits. “The worst-case scenario will of course be involuntary restructuring on the Nakheel security that brings into question the entire nature of the sovereign support for various borrowers in the region.”
Moodys Investors Service and Standard & Poor’s cut the ratings on state companies yesterday, saying they may consider state-controlled Dubai World’s plan to delay debt payments a default. The sheikhdom, ruled by Sheikh Mohammed Bin Rashid Al Maktoum, borrowed $80 billion in a four-year construction boom that reduced its reliance on falling oil supplies and created the region’s tourism and financial hub.
“Dubai is the most indicative of the huge global liquidity boom and now in the aftermath there will be further defaults to come in emerging markets and globally,” said Nick Chamie, head of emerging-market research at Toronto-based RBC Capital Markets.
“It’s very important to resolve this in a way that will minimize contagion across the region,” Matrix Groups Loftus said. The moot question is whether that will be possible.
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