Dubai

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DUBAI UPDATE: Dubai crisis jolts markets, but early fears ease - AP

Yesterday was Thanksgiving in the United States and markets were closed.

Good thing.

The stunning development of the day was news that a debt-laden Dubai state corporation was unable to meet its interest bill.

Dubai World, a company owned by the Arab emirate of Dubai, told creditors it wants to delay payments on $59 billion US of debt for six months as it seeks to restructure money-losing investments.

This news sent global equity markets reeling and generated a safe haven flow into the US Dollar as carry trades are unwound and a flight away from risk occurs. Dubai has for all practical purposes defaulted on its debt. Needless to say, this came with little to no warning and has sent the financial markets into quite a tizzy.

A default by Dubai World would be the biggest by an agency of a national government since Argentina halted bond payments on $95 billion US in 2001. It comes on the heels of an extraordinarily difficult year for the tiny emirate. The 2008 financial crisis has hit Dubai hard, with real estate prices dropping as much as 50% in the past year.

In London, British banks with the heaviest exposure to Dubai suffered some of the steepest losses, sending the Financial Times 100 down 3.2% — its biggest plunge since March.

Shares of Royal Bank of Scotland fell 7.8%, while Barclay’s Bank ended down 8%, and Lloyd’s Bank dropped 5.8%.

HSBC, the biggest lender in the United Arab Emirates, fell 5.8%. HSBC had $15.9 billion US in loans outstanding at the end of June. In Germany, shares of Deutsche Bank tumbled 6.8%. The biggest bank in France, BNP Paribas, fell 5.1%, while Societe Generale, the second-largest French lender, dropped 5.5%.

In Canada, S&P/TSX financials fell 1.7%, with Scotiabank slipping $1.15, or 2.3%, to $47.91, TD Bank off $1.34, or 2%, to $65.84, and the Royal Bank down $1.32, or 2.3% to $55.88.

This sort of news is extremely disturbing. After all, we are talking about the financial hub of the Middle East. Imagine the repercussions that would occur should London have announced this sort of news and you can understand why stock markets were pummeled overnight.

This is the kind of news that could cut off all market rallies right at the knees. The reason – it creates fear and uncertainty, two of the prime ingredients in a selling binge. If Dubai could go under, then who or what might be next becomes the question.

Scotia Capital currency strategist Sacha Tihanyi warned “the thing that would make anyone nervous is the fact that this is a financial-sector shock. It was financial-sector shocks that played such an intensive role in the recession and financial crisis.”

“Dubai is the most indicative of the huge global liquidity boom, and now in the aftermath there will be further defaults to come in emerging markets and globally,” said Nick Chamie, chief of emerging-market research at RBC Dominion Securities.

Some saw the Dubai issue coming. Scotia Capital economists Derek Holt and Karen Cordes told clients in a report that Dubai's borrowing excesses and asset bubble risks were unsustainable.

“In some sense when we look back upon it, maybe this isn't such a surprise after all. There was always something a little Land of Oz-like to Dubai, as if it were a modern-day Rome, symbolic of an overstretched empire in the years of leveraged bubble excess,” they said.

Today we will see the impact in the United States and whether the reaction is temporary or if this is the start of something larger.

You may recall our post of November 14th. SeekingAlpha had laid out three different scenarios that presented a serious concern for the ecnonomy. One of them spoke of concerns that circumstances could precipitate a rapid US dollar rally. A rapid US dollar rally has the potential to spell disaster.

Such a development would force all those people shorting the US dollar to sell stocks to pay off their shorts, a move that would force stocks to collapse (again). US Treasuries would rise, solvency issues would again take hold as China et al would panic and rush to buy US debt for safety's sake, even at low interest rates. The Asian stock markets would then burst in spectacular fashion, wiping out the dramatic gains of the last 8 months.

Yesterday... that scenario began to play out.

Capital has, once again, begun to flee to the security of the US Dollar and the dollar index is up dramatically.

At the time this is written, DOW futures are down almost 300 points.

Later today the US markets will be open.

It's going to be an interesting day.

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