Thursday, November 26, 2009

World Markets Into Downspin After Dubai Debt Problems

Just a year after the global downturn derailed Dubai's explosive growth, the city is now so swamped in debt that it's asking for a six-month reprieve on paying its bills — causing a drop on world markets Thursday and raising questions about Dubai's reputation as a magnet for international investment.

Dubai has shocked investors by asking for a debt standstill at Dubai World, the government’s flagship holding company that has developed some of the world’s most extravagant real estate projects. Dubai’s surprise move angered some investors who had been reassured by local officials for months that the city would meet all obligations on its $80bn (£48bn) of gross debt in spite of recession and a real estate crash. Bond markets reacted sharply to the news with investors demanding higher premiums to hold debt from the region. In London trade it cost about $460,000 annually over five years to insure $10m worth of Dubai government debt against default, compared with $360,000 on Tuesday. Prices rose for its neighbours with Abu Dhabi protection $100,000 more than on Tuesday. State-run Dubai World has $59 billion of liabilities, its subsidiary Nakheel said in August, a large proportion of Dubai's total debt of $80 billion. 
Without much oil revenue, Dubai is reliant on debt markets not only to pay for its ambitious infrastructure projects, but also to service previous borrowing that funded explosive growth in recent years. It and its corporate entities have nearly $50 billion in debt coming due over the next three years, according to Standard & Poor's.
Debt Standstill
Mechanism by which a country agrees to cease payments on its debts until a restructuring agreement has been negotiated with its creditors.
Aftermath of Dubai Debt Problems:-

  • European banks were hit by concern about potential exposure to debt problems in Dubai on Thursday, while companies where Middle Eastern investors own big stakes also came under pressure. 
  • By 1230 GMT on Thursday the DJ Stoxx European bank index was down 3.3 percent at 222 points, putting it on track for its biggest daily fall since June. 
  • Companies with significant Middle Eastern shareholders, such as the London Stock Exchange, were also hit by concern the holdings could be cut to meet obligations at home. Among the biggest fallers were HSBC, Royal Bank of Scotland , Lloyds Banking Group and ING, whose shares all fell over 4 percent.

Shares in Asia tumble before Europe started panicking:-

  • Japan's Nikkei stock average has hit a 4-month closing low on Thursday as the dollar sank to a 14-year low against the yen, pressuring exporters. 
  • Stocks in Hong Kong and China ended down on Thursday as China Minsheng Banking made a disappointing debut, weighing on recently battered banking stocks, while concerns over asset prices put pressure on the Shanghai market.
  • China's key stock index sank 3.62 percent in heavy trade on Thursday, with banks weak as investors fled the market amid mounting worries that the government may take steps to clamp down on surging asset prices. Chinese banking stocks have come under pressure from concerns over potential cash calls by the sector on expectations the government may lift capital-adequacy ratios for larger state lenders next year follwoing a lending boom.
  • Indian shares fell 2 percent on Thursday, the most in more than three weeks, led by losses in banks as investors unwound positions on the last day of monthly derivatives taking cues from lower world markets.

UK bank shares tumble on Dubai debt woes
Moody’s Investors Service has downgraded the ratings of all six government-related issuers (GRI’s) in Dubai and left them on review for possible downgrade
Dubai debt `standstill' raises alarms about image
Dubai shock after debt standstill call
Will It Affect Indian Markets?
UK and European stocks have reacted negatively to Dubai Debt problems and Japan, Hongkong, China have fallen because of their own problems. India has historically corrected in global equity meltdowns and in such a time it shows high-beta nature by falling more than the rest, this we saw when Lehman went bankrupt during subprime crisis. Banking stocks in many parts of the world looked vulnerable - China bank stocks fell on expectations the government may lift capital-adequacy ratios for larger state lenders next year, European banks have fallen after Dubai problems and here in India too Banking stocks saw selling after RBI comment on merger and Government may also delay bank merger had a negative impact. 
Is this the start of the correction for overstretched Indian equities? 
Nifty has returned 69% this year but after hitting 5181 in October, we have not yet seen a new top even after more than a month of trading activity. Volumes have dropped and FIIs have been in selling mode recently. Nifty crucial supports are at 4900 and 4750 below which the correction may deepen. For rally to shape once again, a move past previous top around 5181 with large volumes is necessary.

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