Wednesday, December 09, 2009

Fresh Blow To Global Sentiment As Greece Debt Rating Downgraded
As world was slowly recovering after Dubai Debt Problems now Fitch has downgraded Greece's sovereign debt due to its huge budget deficit. The news has spurred selling in Europe. S&P warned Monday it might cut Greek debt. Moody's said the U.S. and U.K. must cut their deficits to keep their AAA ratings long-term; investors seemed more worried about the U.K. Also, Moody's cut several Dubai-owned firms, citing a lack of gov't support. Dubai shares dived.

  • In a statement, Fitch said it was cutting Greece's rating from A- to BBB+ -- the worst in the eurozone -- with a negative outlook. "The downgrade reflects concerns over the medium-term outlook for public finances given the weak credibility of fiscal institutions and the policy framework in Greece, exacerbated by uncertainty over the prospects for a balanced and sustained economic recovery," the statement said.
  • The Fitch rating agency on Tuesday downgraded Greece's four of the largest banks also, describing prospects for Greek public finances as negative.
  • Tuesday's action was a fresh blow to Greece, saddled with high public deficits and debt, as it came a day after another agency, Standard and Poor's, placed Greek debt under "negative" watch and warned of a downgrading if the government did not rein in its overspending.
  • The moves by the agencies rattled European markets, with the Athens exchange closing more than 6.0 percent in negative territory. Markets fell elsewhere in Europe, which analysts partially attributed to nervousness over the Greek situation.
  • Copper slipped on Tuesday as investors retreated from riskier assets such as commodities and as the dollar rallied against the euro.
  • The dollar made ground against the euro on concerns about Greece's fiscal health after Fitch downgraded the country's credit rating.
First Dubai, Now Greece - How Many More To Come?
The Dubai Desert Storm was just settling and Greece has hit a fresh blow to global market sentiment. We saw how Bear Stearns became bankrupt after sub-prime mess but then slowly many companies including Lehmann faced problems creating a downward spiral in global markets. Those were just companies going bankrupt but now the risk is "Sovereign" - Dubai is a city-state and Greece is an important country as it is one of the 16 countries using Euro as the currency. 
While the macro economic impact on India and most other nations may be limited, the fear of a debt default from Dubai may end up being a much needed reality check for global investors, who seem to have forgotten one of the worst financial crises in history a little too fast.
One needs to be cautious with momentum picks especially those related with Dubai :-
Property Market-

  • The Indian property developers who did venture into Dubai are likely to be impacted in a big way.
  • Jones Lang LaSalle Meghraj's chairman and country head for India Anuj Puri says "There will be a negative impact on Indian developers in Dubai, since this is a situation where prices are expected to come down in Dubai. These players would have acquired projects to sell them at a particular price. With pricing taking a beating, the profitability of these projects is reduced.
  • "Construction companies who had gone to Dubai to carry on contract jobs would also be affected, since payments would get delayed and project sizes will be curtailed, thereby affecting their bottom-line. Many projects will get delayed or trapped, meaning a decrease in business. Commitments from Dubai-based companies into India will also reduce."
  • Those involved in construction in Dubai include Nagarjuna Constructions, Larsen & Tubro, Omaxe and BSEL Infra.
In recent years, Indian banks have made significant progress in expanding their network overseas and Dubai is one city where many set up shop. According to experts, the crisis may not have a major impact on India's big banks, barring Bank of Baroda. That bank's total exposure in Dubai is around Rs4,000 crores.
Media and Entertainment-
The crisis rattled Bollywood initially. The Middle East, particularly Dubai, is one of the biggest overseas markets for the Mumbai film industry,generating almost 50 per cent of its international revenue.
Movie analyst Komal Nahata told the Hindustan Times: "For an A-grade film, over 40 per cent of the collection comes from overseas and Dubai contributes a major 10 to 15 per cent. Dubai is one of the few overseas markets where Hindi films release on Thursdays.
Other impacted Stocks-
MM Miyajiwala, Executive VP and CFO at Voltas, said the company is executing a Rs 900-crore project in Dubai as part of a joint venture where Voltas has 37% stake. “We are executing the project for Emaar and the client has fully funded the project. Thus, we are not anticipating any delays,” he said. “Our order book is primarily from Abu Dhabi and Qatar. Dubai also has not defaulted on any of our payments.”
Aban Offshore, the oil exploration company has deployed six rigs in West Asia.
Dubai World’s investment arm, Istithmar, holds 13% stake in SpiceJet
Macro Impact-

  • Remittances from Dubai account for nearly 10% of overall remittances to India and any slowdown may affect forex reserves of India to some extent.
  • The UAE was India's top destination for exports for the year ending March this year, displacing the US. The country's total exports to the UAE grew by a phenomenal 53% this financial year.
  • Dubai has investments in India too. DP World, part of Dubai World, runs five container terminals in India, accounting for 40% of India's container traffic. The company has invested over US$2 billion in India and had said it would spend US$12 billion more in the next five years.

India’s central bank has told banks to furnish details of their exposure to Dubai World
Indian Banks' Exposure to Dubai
Dubai: From growth to crisis
Asian stocks fell, led by finance and mining companies, after Japan’s economy grew more slowly than estimated and Fitch cut Greece’s credit rating, denting confidence in the global economic recovery.
Greek and Dubai debt in downgrade

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