Dubai’s Debt Crisis Primes the Panic Pump
by Ryan Cole, Investment U Research
November 30, 2009
Dubai reminded the world last week: this crisis isn’t over.
With a surprise debt restructuring request by Dubai World – Dubai’s corporate front – and a plea from the tiny UAE for creditors to accept delayed payment, nervous global markets swiftly headed into reverse.
The announcement was timed to land during an extended American holiday, but the markets didn’t care. And while prices have stabilized, investors are just now starting to come to grips with the shock – and the meaning – of this latest development.
Yes, There’s Good News
First, the good news: This hasn’t yet reached default status. Should banks agree to extend Dubai World – and, by extension, backing the Dubai government – with a six-month moratorium on interest and payments, Dubai believes that it can escape this trap without a default.
Also, the numbers we’re talking about are relatively small – only $60 billion, roughly one-third the market cap of Apple (Nasdaq: AAPL).
Finally, most of the risk is limited to the UAE and Middle East – home to most of the banks that have lent to Dubai World. Barclays Bank, with $200 million in exposure, leads banks outside the region. However, Barclays says that position is well hedged.
These Four Countries Are in Trouble
Now, the bad news: The $1.7 trillion in credit write-offs that the world has already suffered isn’t about to end – and we may be entering a larger, more dangerous phase.
Dubai officially opens default season for countries – or, in this case, large political bodies. With governments around the world racking up unprecedented debt and the first domino now falling, the “Who’s Next?” guessing game has now entered into the financial pages.
Popular choices include:
- Japan (worst debt-to-GDP ratio – nearly 200%)
- The U.K. (worst deficit-to-GDP ratio – over 14%)
- The U.S. (highest debt and deficit in real terms)
- Italy (perennially struggling with a large, unwieldy debt)
To be clear, we’re not saying that these countries are about to default. Japan owes almost all its debt internally. Britain had a relatively low debt starting point. America largely controls the exchange rate of the currency its debt is held in – and can always print dollars – while Italy has actually faced the crisis with decent discipline so far.
Speculation Killed the Cat
In itself, Dubai’s crisis isn’t that bad.
However, the news has opened the doors to active speculation. And by extension, banks and other bodies that have lent to these countries (and others) may see votes of no confidence in their shares.
In addition, investors are on edge again and possibly primed to panic. If another domino falls sometime soon, look out.
Good investing,
Ryan Cole
Any investment contains risk. Please see our disclaimer.
One Response to “Dubai’s Debt Crisis Primes the Panic Pump”
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Who didn’t see this one coming? Dubai’s been building islands in the desert and driving gold plated cars. Now the banks are going to have to repossess all of these orphaned cars and homes (see: http://www.repofinder.com). Good luck to the banks who have to sell the gold plated cars.
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