Stocks took a sharp cut in opening trade Friday in reaction to Dubai’s debt crisis. Banking and
realty stocks were the worst hit.
National Stock Exchange’s Nifty was trading at 4896.80, lower by 2.23 per cent or 10 points from the previous close. Bombay Stock Exchange’s Sensex was at 16501, down 353 points or 2.11 per cent.
“Fears of a potential default by Dubai sent shock waves through financial markets, mauling stocks prices across the globe. Safe haven buying led to upward momentum in gold, government bonds and also lifted US Dollar from its lows.
Our markets also violated an important trend line support and closed below a crucial support of 17000 on the Sensex and 5050 on the Nifty with record volumes. We are now looking at 16500 on the Sensex or 4900 on the Nifty to stem this tide of selling,” said Anagram Stock Broking.
Asian markets took a severe beating on concerns about Dubai's debt rescheduling. Dubai said on Wednesday it wanted creditors of Dubai World and property group Nakheel to agree a debt standstill as it restructures Dubai World, the conglomerate that spearheaded the emirate's breakneck growth. The Nikkei shed 1.64 per cent, Topix lost 1.26 per cent, Hang Seng tumbled 2.76 per cent and Straits Times fell 1.1 per cent.
Dubai had accumulated $80 billion of debt by expanding in banking, real estate and transportation. S&P had placed the ratings of four Dubai-based banks on negative outlook due to their exposure to Dubai World.
Meanwhile, US markets were closed for the Thanks giving holiday. On Friday, trading will resume, but the US stock market will close early at 1 pm.
Dubai World’s creditors have a weak hand. The restructuring of the $60 billion of debt at the emirate’s core holding company, which includes investment vehicle Istithmar and property developer Nakheel, will be the largest and toughest ever in the Gulf region. The few precedents are not encouraging for those who funded Dubai’s grandiose vision.
Shocked creditors had expected timely repayment. Now, they are scrambling to form steering committees to liaise with Dubai World’s new restructuring chief, Deliotte’s Aidan Berkett. In practice, lenders can’t really turn down the request for a six month standstill, until May 2010, and have little option but to wait for Dubai World to formulate a plan to address its sprawling debts.
Even if loans are secured and the underlying paperwork is comprehensive, the region’s laws are unfriendly to creditors. It is almost impossible to seize collateral. The courts have consistently rejected claims by lenders to Kuwait’s Global Investment and Investment Dar, financial firms which defaulted at the start of the year with combined liabilities of $5.5 billion. In the Kingdom of Saudi Arabia, authorities even prioritised the claims of local lenders over the foreign banks which are estimated to be owed $16 billion by two leading merchant families, the Saads and Algosaibis.
What’s more, restructurings in the region to date have been relatively simple. Kuwait’s Global Investment and Investment Dar simply plan to repay creditors by pushing out maturities by up to five years. Dubai World has some good assets, but the sharp drop in property prices probably means a deeper restructuring will be required. In the West, debt-to-equity swaps are a common fix. But there is no precedent in the Gulf. Dubai World’s mix of Islamic instruments and government-ownership could add further complications.
The list of Dubai World’s creditors has not been published, but some of the biggest banks in the West and Gulf are likely to feature. Resource-poor Dubai depends too much on international markets to treat foreign creditors quite as badly as the Saudis have done, but that’s only a small comfort.
Everyone knows money is not a panacea. Cash cannot cure broken hearts, and all that. But the news from Dubai and the foreign exchange markets shows that ample supplies of money can’t even solve all financial problems.
Credit may still be tight for many borrowers, but the world’s governments and central banks are spreading around plentiful supplies of cheap funds. Policy interest rates are about as low as possible, and government deficits, which put additional cash into the financial system, are giddily high in most of the world.
This multilateral and multi-pronged stimulus has buoyed many markets — from commodities to Asian real estate, equities, credit, and government bonds. Without it, bank losses would be higher and the recession would presumably have been deeper and longer. No one has thought of a better way to deal with the popped credit bubble.
But the money flood cannot smooth down every mountain of foolish debt. In Dubai, oil revenues from the neighbourhood and credit from the world were supposed to pay for the construction of a financial hub. The cash has now run out.
On Wednesday afternoon, the emirate’s largest holding company, Dubai World, asked creditors for a standstill on payments on $60 billion or so of debts. A thorough restructuring may be the best way forward for Dubai, but investors were shocked. The spread on the emirate’s sovereign credit default swaps widened by one percentage point and European stock markets dropped two percent on Thursday morning.
Dubai’s problems are a relic from the past. The future is also a worry — no one is sure what happens to markets and economies when the stimulus is withdrawn. The price of gold is soaring in large part because investors are buying the yellow metal as insurance against monetary calamity.
The monetary support is also causing troubling side effects in the present. Low dollar interest rates and the fear of future inflation are pushing the greenback down. On Thursday, it fell below 87 yen, the lowest value since 1995. There is talk of trade disruptions and government intervention.
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