vendredi 5 février 2010

A new meltdown: Dubai credit crisis

Who expected that the fears of the late US crisis contagion will be turned one day to fears of Dubai crisis contagion across the borders? And the saying "when the US sneezes, the rest of the world may well catch a cold" may be revolutionized by "when the Dubai sneezes, the rest of the world may well catch a cold" though Analysts who have been assessed the Middle-Eastern exposure to the toxic securitized vehicles of Subprime found themselves geared to assess international banks exposure to the small Middle Eastern prominent city of Dubai.

The world economy was just about breathing a sigh of relief after huge universal attempts to reassure the recovery and to restore the confidence in the financial market down to the late global financial tsunami. But suddenly, the Dubai Debt comes to reawaken a new phase in global financial meltdown proving that the latter is not over and the credit crisis still persists. The Dubai crisis burst on the end of November 2009, generally caused by a mess in cash flow mismatch due to amiss structuring in which the long term investments have been financed by short term loans, instead of the pretended oil revenues which are in fact scarce for the Dubai emirate. The concerns started just after Dubai World, the investment arm of Dubai, asked its creditors for a six-month moratorium on nearly $60 billion debt.

However, these concerns were transformed to crisis only after the release of the eventuality that Abu Dhabi, the oil-rich mother of the emirates which has in the past given rescue loans, would leave its extravagant charming Dubai, to its fate. The Dubai's over-ambitious development plans are shattered by collapsing real estate prices.
Akin to the Lehman Brothers bust of the mid-September 2008 in terms of spillover effect, the Dubai debt has caused selling off panics in world markets by fears that international banks could suffer big losses if Dubai defaulted on its $60 billion debt. The World stocks have plummeted by 2.5 percent following this event. On the Dubai bourse, construction and financial stocks slumped nearly 10% while the broke Dubai World fell 15%. U.S. stocks fell sharply also. The Dow Jones industrial average slumped by 155 points, or roughly 1.5 percent, in a shortened trading day, Oil prices plunged as much as 7 percent before recovering some ground later in the day. In England, the FTSE 100 plunged by 171 points, its biggest one-day fall year-to-date and the Financial Services Authority have asked UK banks to issue their loan exposures to Dubai. HSBC shares also slumped by 5 per cent, slashing £6.2 billion from its value. According to the United Arab Emirates Banks Association, HSBC has £11 billion of loans outstanding to the UAE, of which Dubai is one of seven emirates. More than £2.6 billion was wiped from the value of Barclays, while Lloyds and Royal Bank of Scotland, both partly owned by the taxpayer, saw their values fall by £1.7 billion and £1.5 billion respectively. A significant portion of this debt is in bonds trading enterprises in Russia, Shanghai and Mumbai, due to the excess of leverage.

These facts show how vulnerable international markets are to the aftermath of the debt-ridden Dubai. This proves also how fragile the confidence left in the market by the Global financial crisis.

However, the spillover effect was too short unlike Lehman Brothers. The Abu Dhabi bailout of Dubai debt by $10 billion on mid-December has halted the fears and has set the confidence that the spillover effect would not be great to affect other gulf economies. Immediately, Dubai's main index shot up 10.4 percent and European markets bounced back as well. Indeed, analysts reckoning the exposure of global banks to Dubai debt deemed that individual lenders can absorb the shock. Credit ratings firm Moody's dropped the idea of altering international bank ratings due to developments.

But this doesn't mean that things back definitely as usual. Many things will be set to change after this shock. Investors risk aversion would reset higher. In fact, Banks could further tighten lending to reduce exposure to the sector and tackle their liquidity problems. Asset managers will be more cautious to assess and differentiate more between risks rather than deliberating on arbitrary portfolio's diversification. This crisis could even weaken the recovery after the deepest recession in decades.