Friday, November 27, 2009

How Dubai is affecting global markets

Catching up with some news today. The main theme in my Twitter stream yesterday and into this morning has been Dubai.

Specifically, markets around the world have been moving on news of Dubai World's debt restructuring (possible delay of debt repayments) and what that could mean for Middle Eastern and emerging markets in a larger sense.

More from Financial Times, "Dubai sends markets into turmoil":

Stock markets around the world were convulsed yesterday as investors scrambled to understand the implications of Dubai World's restructuring and unexpected debt standstill.

The lack of information about Dubai's flagship government-owned holding company, made worse by a religious holiday in the Middle East, prompted indiscriminate selling of stocks linked to the region. The cost of insuring against default in emerging markets around the world also leapt...

With trading volumes low because of the Eid holiday and US Thanksgiving, investors moved into safer assets, pushing up prices of traditional havens such as government bonds...

Investors said that the lack of information about the debt standstill, announced on Wednesday, was the key factor sparking the wider turmoil. "

Adding to our earlier theme of sovereign debt default, Bloomberg notes that Dubai's debt problems may trigger a major sovereign default if the problems are not contained within the emirate's corporate sector.

"Dubai’s debt woes may worsen to become a “major sovereign default” that roils developing nations and cuts off capital flows to emerging markets, Bank of America Corp. said.

“One cannot rule out -- as a tail risk -- a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s,” Bank of America strategists Benoit Anne and Daniel Tenengauzer wrote in a report.

A default would lead to a “sudden stop of capital flows into emerging markets” and be a “major step back” in the recovery from the global financial crisis, they wrote..."

Of course, this seems to be analysts' worst-case scenario for debt markets and emerging markets, but it seems all eyes are currently on Abu Dhabi to determine if there will be some sort of bailout for its neighboring emirate, Dubai.

Related articles and posts:

1. Dubai Debacle (linkfest) - MarketNut.

2. Investors to leave Dubai for Abu Dhabi, Egypt - Reuters.

3. Mobius says Dubai may trigger mkt correction - Bloomberg.