Friday, November 27, 2009

Dubai: Lead Domino of the Next Round?

Last week, just in time for the inevitable information lockdown created by the Eid holiday, the United Arab Emirates requested that creditors of Dubai World, the state-owned investment company that essentially manages the UAE's investments and development projects, delay repayment of approximately $60 billion in debt coming due next month.  This comes after Sheikh Mohammed sacked, among many others, Dr. Omar bin Sulaiman from all his posts last Saturday and named Ahmed al-Tayer as the new governor of the Dubai International Financial Centre, signaling further retrenchment by the al-Maktoums by purging the Ivy League New Guard and replacing it with old, family allies.  This also comes after a $5 billion bond issue that had been represented as ear-marked for next month's debt payments but that is now obviously going to something the UAE considers more pressing, but what that something is remains a mystery.

But it doesn't stop there.  The bond prices of course tanked, and the spread on insuring Dubai debt shot past Icelandic levels as the threat of sovereign default became a real player at the table.  Then there is the effect on the $123 billion in debt held by foreign banks.  $50 billion is held by UK banks, notably HSBC, Standard Chartered, Barclays, and RBS, but there is plenty to go around.  BNP Paribas holds about $1.7 billion, Citigroup $1.9 billion, and Goldman Sachs a mere $600 million.  Any bets on how fast this ends up on the books of US and UK taxpayers?

And this morning I read something really disturbing.  It's an open question how much Dubai's problems will spread throughout the Gulf.  The spreads for Bahrain, Abu Dhabi, and Qatar have jumped appreciably.  But when asked about the growing cost of finance in the Gulf, a spokesman for Munich Re said, "As for whether the cost of insuring debt in the Gulf will soar it is too early to judge the situation."

Wait a minute, isn't it your job to judge these situations?  And if the reinsurers aren't making these "judgments," what exactly is the current market in hedging instruments based on other than balloon juice?  Two years into this train wreck, and we haven't learned a thing.

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