Dubai revelations raise fears of sovereign debt default, spook investors

DUBAI – Worries of a double-dip global recession are being fanned, as world markets and oil prices on Friday fell with investors spooked by Dubai’s shock request for a six-month delay in repaying the debts of a key state investment firm.

“Dubai: Minor upset in playground of the rich – or first domino of new crash?” read a headline in the online version of British newspaper The Guardian.

Analysts grappled with the implications of the debt bombshell involving Dubai World – the city-state’s key engine of growth with interests ranging from ports to real estate, with reportedly US$59 million ($82 million) in liabilities.

Was it was a portent of yet more unexploded bombs littering the world economy, a sign that the worst systemic holes have yet to be uncovered? Some feared so.

More immediate questions were raised about the exposure of international banks only recently the recipients of government-backed rescue plans – and the ‘what if’ possibility of a sovereign debt default.

On Friday, jittery investors dumped shares of two foreign banks with the heaviest exposure, HSBC and Standard Chartered, whose stocks dropped more than 7 per cent on the Hong Kong exchange.

Both were criticised, with some saying the banks should have known of the problems with Dubai’s debt-fuelled binge on infrastructure spending in recent years.

Japan’s largest banks Mitsubishi UFJ Financial and Sumitomo Mitsui were also identified as among a consortium of 11 creditors that have lent to Dubai World. Sumitomo Mitsui alone is owed more than US$200 million, AFP reported.

Oil prices fell to near US$74 a barrel in Asia, amid uncertainty over the extent of Dubai’s financial woes.

Attempting to quell such fears, the emirate’s ruling family on Thursday night stressed that its intervention in Dubai World was “carefully planned”.

Even so, Asian indices suffered massive falls on Friday, with Hong Kong’s Hang Seng Index diving almost five per cent – its biggest single-day drop in eight months – prompting Financial Secretary John Tsang to reassure investors that loans to Dubai World and the United Arab Emirates amounted to less than 0.4 per cent of total portfolio of the city’s banks.

Shares in Tokyo fell 3.22 per cent, hit also by the yen striking a fresh 14-year high point against the US dollar.

Shortly after the start of European trading, London’s benchmark FTSE 100 index was down 0.36 per cent, a day after falling by its sharpest amount since March.

US markets, reopening after Thanksgiving, xxxxxx UPDATE TO COME

Markets in Singapore, Kuala Lumpur and Jakarta were closed on Friday for the Hari Raya Haji or Eid al-Adha public holiday.

SUBHD: ‘Dubai is not America’

In terms of scale of exposure, what western creditors to Dubai are facing is small compared to the scope of the bank bailouts needed earlier in the financial crash, analysts note.

Nonetheless, should Dubai World default, it would send fresh shockwaves through the system. Its largest creditor outside the emirate seeking to reschedule debt is the Abu Dhabi Commercial Bank PJSC, owed $1.9 billion, Bloomberg reported.

According to the Emirates Bank Association, HSBC has US$17 billion invested in the UAE as a whole, Standard Chartered US$7.8 billion, Barclays US$3.6 billion and RBS US$2.2 billion. Citigroup has $1.9 billion sunk in, reported The Guardian.

The greater damage may be to confidence in the global economy, with analysts predicting a resurgence of investor risk aversion.

“The crisis in Dubai has brought up speculation about how many more skeletons might be left in the cupboard,” said strategist Richard McGuire with the Royal Bank of Canada.

There is fear of a new wave emerging of victims needing an International Monetary Fund bailout, after the likes of Iceland and Pakistan, analysts said.

But Hong Kong-based strategist Emil Wolter does not think it the trigger for a new crisis. “Yes, the magnitude of the situation is dramatic for Dubai. But Dubai is not America – and a property crisis in Dubai will not cause the same global crisis as a property crisis in the States,” said Mr Wolter, quoted by the New York Times.

SUBHD: What price, a rescue

The key question, many believe, is when and at what cost – rather than if – Abu Dhabi will come again to its fellow emirate’s rescue.

It is rich enough and has a reputation to protect, though it would “probably extract a painful price from Dubai,” said commentator Nils Pratley said at guardian.co.uk. “The difficulty lies in judging Abu Dhabi’s appetite for a rescue … This crisis in the Gulf is unlikely to be resolved quickly.”

In the meantime, Knight Frank’s James Lewis warns that property prices might be hit as Dubai World sells “trophy assets” around the globe to raise cash.

For investors, this is a reality check on the recent market rally, in the vew of professor of asset management Andrew Clare at Cass Business School.

“Equity prices had gone too far. Investors are underpricing all the risks that are out there, and this is just one of them. Some of those risks are going to come home to roost, and this is just the first.”

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