Dubai Shows Limits of Government Rescues

The worldwide decline in equities spurred by Dubai’s efforts to reschedule its debt is a sign that government spending alone won’t be enough to protect financial markets, according to Arnab Das of Roubini Global Economics.

Stock volatility will probably jump as countries and companies default on loans, said Das, the head of market research and strategy at RGE, the advisory firm founded by economist Nouriel Roubini.

Shares slumped from Shanghai to Brazil and European shares fell the most in seven months yesterday after Dubai World, the government investment company burdened by $59 billion of liabilities, sought to delay repayment on much of its debt. Governments have spent, lent or guaranteed $11.6 trillion and central banks held interest rates near zero percent to end the first global recession since World War II.

“We’re bound to see a rise in risk aversion,” Das, who is based in London, said in an interview. “The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear. We still have to work out those balance sheet stresses. The recovery is proceeding, but significant challenges still lie ahead.”

Japanese stocks fell today after commodity prices declined and the dollar depreciated to a 14-year low against the yen, dimming the overseas earnings prospects for exporters. The Nikkei 225 Stock Average lost 1.9 percent to 9,204.65 as of 10:10 a.m. in Tokyo. Futures on the Standard & Poor’s 500 Index slipped 2.1 percent after the MSCI World Index of 23 developed- country markets lost 1.4 percent yesterday.

Bank Writedowns

Banks wrote down or lost $1.7 trillion from the collapse of the subprime mortgage market and raised $1.5 trillion since the credit crunch began in 2007, data compiled by Bloomberg show.

“In some countries and sectors, debtors will be able to get by because government intervention has made it easier for them to refinance,” said Das. “In other places, excessively leveraged debtors, who always get access to too much credit during a boom, cannot roll over their debt and will default.”

Das, the former head of emerging-markets strategy at Dresdner Kleinwort, joined RGE last month to lead a new team that advises investors on allocations in stocks, bonds, interest-rate products, commodities and currencies in developed and emerging markets. Roubini, an economics professor at New York University and chairman of RGE, predicted the financial crisis that spurred credit losses and asset writedowns at global financial companies.

Protected Investors

Roubini’s 2006 warning about the crisis shielded clients from the worst slump in global equities since at least 1988. He said in March that the stock rally that began that month was a “dead-cat bounce” and that it may “fizzle” in May. The MSCI World Index of has since rallied 68 percent, and the Standard & Poor’s 500 Index has climbed 64 percent in the steepest rally since the Great Depression.

Roubini warned in July that the economy is “not out of the woods.” Reports since then have shown that the U.S. exited a four-quarter contraction in gross domestic product, expanding 2.8 percent from July through September.

The benchmark index for U.S. stock options, which measures the cost of using options as insurance against declines in the S&P 500 over the next month, has dropped 49 percent this year. It surged last November to a record 80.86, a level almost four times higher than its 20.28 average over its 19-year history.

Market Correlation

The so-called correlation coefficient that measures how closely markets rise and fall together reached the highest level ever in June, with the S&P 500 and benchmark measures for raw materials, developing-country equities and hedge funds rallying in tandem, according to data compiled by Bloomberg. Oil has jumped 71 percent this year, the Reuters/Jefferies CRB Index of 19 raw materials climbed 21 percent and the MSCI Emerging Markets Index soared 69 percent.

“All this should magnify differentiation between riskier and less risky asset classes and names, after a couple of quarters in which correlations have risen sharply as market participants put on risk pretty much across the board,” Das said. “That will make it harder to make money simply by riding the liquidity wave from central banks. People are going to have to start focusing even more on the fundamentals.”

Via : Bloomberg

Abu Dhabi Commercial Said Owed $1.9 Billion by Dubai

Abu Dhabi Commercial Bank PJSC may be owed $1.9 billion by Dubai World, making it the largest creditor outside the emirate to the state company seeking to reschedule debt, said two people familiar with the companies.

“We are in touch with Dubai World, and we have been in discussions more than once today and yesterday,” Ala’a Eraiqat, the chief executive officer of the third-largest lender in the United Arab Emirates, said in a telephone interview yesterday. He declined to comment on specifics. “We have a lot of assurances which is a good thing.”

HSBC Holdings Plc and Standard Chartered Plc led declines in bank shares in Asia today, and European stocks fell the most in seven months yesterday after Dubai World, with $59 billion of liabilities, said it will seek a “standstill” agreement to delay repayment of its debt. Royal Bank of Scotland Group Plc, Lloyds Banking Group Plc and Credit Suisse Group AG slumped on concern Dubai will rattle lenders recovering from the global credit freeze that has triggered $1.72 trillion in losses and writedowns.

Dubai World, controlled by the emirate’s ruler, Sheikh Mohammed Bin Rashid Al-Maktoum, borrowed from more than 70 lenders to buy assets ranging from stakes in Las Vegas casino company MGM Mirage to London-traded bank Standard Chartered through Istithmar PJSC. The request for a postponement includes $3.52 billion of bonds due Dec. 14 from property unit Nakheel PJSC.

“Our exposure is immaterial,” Credit Suisse spokesman Marc Dosch said. Spokespeople for Barclays, HSBC, Lloyds and RBS declined to comment.

Impact ‘Manageable’

HSBC, Europe’s largest bank, fell as much as 7.1 percent in Hong Kong trading today and Standard Chartered dropped as much as 6.4 percent, following declines in London yesterday.

Goldman Sachs Group Inc. analysts led by Roy Ramos estimated potential credit losses at HSBC related to Dubai World may be $611 million, and $177 million for Standard Chartered, according to a research report released today. The impact on both banks will be “manageable,” the analysts wrote.

Sumitomo Mitsui Financial Group Inc., Japan’s second-largest bank by market value, may be owed at least $225 million by Dubai World, according to people familiar with the matter. Mizuho, the No. 3, may be owed about $100 million, the people said. Spokespeople for both banks declined to comment.

Property Collapse

Dubai borrowed $80 billion in a four-year construction boom that transformed the sheikhdom into a regional tourism and financial hub. It suffered the world’s steepest property slump in the global recession, with home prices dropping 50 percent from their 2008 peak, according to Deutsche Bank AG.

“We understand the concerns of the market and the creditors in particular,” Sheikh Ahmed Bin Saeed Al-Maktoum, who chairs the Supreme Fiscal Committee in charge of apportioning financial support to ailing companies, said yesterday in the first statement from the government since it announced the debt rescheduling. “However, we have had to intervene because of the need to take decisive action to address its particular debt burden.”

Dubai World had $59.3 billion in liabilities and $99.6 billion in assets at the end of 2008, subsidiary Nakheel Development Ltd. said in an August statement. Dubai has a total $4.3 billion of government and corporate debt due next month and $4.9 billion in 2010’s first quarter, Deutsche Bank data show.

“The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear,” said Arnab Das, London-based head of market research and strategy at Roubini Global Economics. “Of course, Dubai had a lot of the excesses during the bull market.”

Fundraising

Dubai is one of seven sheikhdoms in the U.A.E. Abu Dhabi, another of the emirates, holds 8 percent of the world’s oil reserves and bought $5 billion of bonds sold by Dubai this week through state-controlled banks. Sheikh Mohammed turned to Abu Dhabi’s central bank on Feb. 23 to raise $10 billion by selling debt.

Dubai World’s biggest creditors are Abu Dhabi Commercial and Dubai-based Emirate NBD PJSC, the United Arab Emirates’ biggest lender by assets, according to two people familiar with the situation who declined to be identified because the information isn’t publicly available.

The debt owed to Abu Dhabi Commercial adds to problem loans from Saad Group and Ahmad Hamad Algosaibi & Bros Co., the Saudi Arabian family companies that defaulted earlier this year. Abu Dhabi Commercial fell 31 percent from Sept. 17 to Nov. 1 after the bank said it was owed a total $610 million by the two companies. The stock has risen 22 percent this month. It didn’t trade yesterday during the Eid Al-Adha religious holiday.

Bank Shares Slump

“Nobody can know how much exposure these banks have got to Dubai unless they choose to tell you themselves,” said Simon Maughan, an analyst at MF Global Securities Ltd. in London. “I don’t think Dubai will default, however. Once there’s been a bit of horse trading over the weekend, Abu Dhabi will step in and bail out Dubai.”

Royal Bank of Scotland, Britain’s biggest government- controlled bank, slumped 7.8 percent to a seven-month low of 33 pence yesterday. Barclays, the U.K.’s second-biggest bank, fell 8 percent, the most since June. Lloyds, the U.K.’s biggest mortgage lender, retreated 5.8 percent. London-based HSBC, Europe’s biggest bank, fell 4.8 percent. Europe’s Dow Jones Stoxx 600 Index lost 3.3 percent in London, the biggest drop since April 20.

Barclays, Deutsche Bank AG and Citigroup Inc. “stressed privately” that their “exposure to Dubai World was limited or insignificant,” the Financial Times reported on its Web site.

Protection Costs Soar

The MSCI World Index of 23 developed markets has risen 25 percent this year after banks worldwide recorded more than $1.7 trillion in writedowns and losses and governments committed about $12 trillion to shore up economies.

Moody’s Investors Service and Standard & Poor’s cut their ratings on Dubai state companies this week, saying they may consider Dubai World’s plan to delay debt payments a default.

The cost of protecting Dubai bonds against default has soared to the fifth highest worldwide, exceeding Iceland’s and Latvia’s, at 530 basis points after the biggest increases since the credit-default swaps began trading in January, according to CMA Datavision prices. Default swaps on Dubai World unit DP World Ltd., the Middle East’s biggest port operator, jumped by a record to 612 basis points yesterday.

The contracts, which increase as perceptions of credit quality deteriorate, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point is 0.01 percentage point and is equivalent to $1,000 a year on a contract protecting $10 million of debt.

The price of Nakheel’s bonds fell to 70.5 cents on the dollar yesterday from 84 cents Nov. 25 and 110.5 cents a week ago, according to Citigroup Inc. prices on Bloomberg.

Via : Bloomberg

Dubai debt crisis hits David Beckham, Brad Pitt

The effects of Dubai's spiralling credit crisis has not spared even the coffers of Hollywood with A-listers like Brad Pitt and David Beckham among those affected.

The two have seen the value of property they bought in the Gulf plummet as Dubai struggles under a mountain of debt, reported Daily Mail online.

Things have now gone from bad to worse after Nakheel, the island's developer, and its parent company Dubai World made a request on Thursday to suspend debt repayments.

Star footballers Michael Owen, Joe Cole, Andy Cole, David James and Kieron Dyer are all thought to have bought homes on the manmade island.

The Dubai government has been forced to call in accountants Deloitte to advise on a financial restructuring, as its economy buckles under a debt of $80 billion, said the report.

This could cause a major crisis of confidence in the region at the time when the global economic recovery remains fragile.

Stocks Fall on Dubai Concern; Yen Strengthens

Stocks dropped around the world, Treasuries jumped and credit default swaps climbed after Dubai’s attempt to reschedule its debt rattled investors. The dollar briefly fell below 85 yen, a 14-year low, before erasing most of its losses on speculation Japan will intervene.

The MSCI Asia Pacific Index slid 2.3 percent to 114.86 as of 1:30 p.m. in Tokyo, the biggest drop since Aug. 17. Standard & Poor’s 500 Index futures dived 2.3 percent. Ten-year Treasury yields fell seven basis points to 3.20 percent, the lowest level in seven weeks. The yen climbed as high as 84.83 per dollar, the strongest since July 1995, before paring its advance to 86.46.

Dubai World, the government investment company burdened by $59 billion of liabilities, sought to delay repayment on much of its debt. Japan’s Finance Minister Hirohisa Fujji said he may contact the U.S. and Europe to act on currencies, signaling his growing concern that the yen’s ascent will hurt the economy.

“If Dubai has to default, that could start a wave of defaults in other areas,” Mark Mobius, Chairman of Templeton Asset Management Ltd. said in an interview on Bloomberg Television from Hanoi. “This may be the trigger to allow for the market to take a rest and pull back.”

Banks were the biggest drag on the MSCI Asia Pacific Index today. HSBC Holdings Plc, Europe’s largest lender, tumbled 6.1 percent to HK$88.40, while Standard Chartered Plc sank 5.8 percent to HK$191.30. Goldman Sachs analysts led by Roy Ramos estimated potential credit losses at HSBC will be $611 million, and $177 million for Standard Chartered, according to a research report today.

Exporters Slump

Makers of electronics and cars contributed the most to the Topix index drop in Japan as the yen’s gain threatened to erode overseas earnings. Sony Corp., which makes the PlayStation 3 game machine, fell 3.6 percent to 2,285 yen. Honda Motor Co., a carmaker that gets 47 percent of its sales in North America, lost 2.9 percent to 2,685 yen.

Dubai concerns yesterday drove Europe’s Dow Jones Stoxx 600 Index down by 3.3 percent, the most since April 20. The MSCI World Index sank 0.5 percent today after yesterday’s 1.4 percent drop. The Morgan Stanley Emerging Markets Index, which has gained 67 percent this year, fell 1.8 percent, adding to a 2.1 percent drop yesterday. The U.S. markets were closed yesterday for the Thanksgiving holiday.

Dubai, which borrowed $80 billion in a four-year construction boom to transform its economy into a regional tourism and financial hub, suffered the world’s steepest property slump in the worst global recession since World War II. Home prices fell 50 percent from their 2008 peak, according to Deutsche Bank AG.

‘Contagion Effect’

“People are worried about the contagion effect from Dubai,” said Nader Naeimi, a Sydney-based strategist at AMP Capital Investors, which holds $75 billion in assets. “Events like this bring back all the bad memories from the global financial crisis.”

Shares of building companies fell on concern they may lose revenue from Dubai. Obayashi Corp fell 11 percent to 276 yen, while Kajima Corp., Japan’s biggest listed construction company, slid 9 percent to 172 yen. The companies may lose “tens of billions of yen” should they fail to receive revenue from their projects, Hiroki Kawashima, an analyst at Daiwa Securities Group Inc., said in a Japanese-language report today.

The MSCI Asia Pacific Index has climbed 63 percent from a more than five-year low on March 9 amid signs stimulus measures were reviving economies following the worst financial crisis since the Great Depression. Writedowns and losses stemming from the crisis have risen to more than $1.7 trillion since 2007, according to Bloomberg data.

Intervention Risk

Japan’s Fujii said Group of Seven nations “will do what is necessary.” Financial Services Minister Shizuka Kamei urged an international response to halt the currency’s gain.

“People are scared and concerned about possible intervention,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo. The Bank of Japan may sell the yen “and buy Treasuries, which will be a plus for Treasuries.”

Treasuries rose the most in almost two weeks and the yield on the benchmark 10-year note touched 3.18 percent, the lowest since Oct. 8. Yields on five-year Japanese government bonds sank to the lowest since 2005, while yields on 10-year Australian government bonds lost eight basis points. The yield on South Korea’s 4 percent bond due June 2012 fell 16 basis points to 4.07 percent.

Dollar, Yen

The yen and the dollar rose against all of the rest of the 17 most-active currencies as investors exited high-yielding assets. The Australian dollar fell 1 percent to 90.46 U.S. cents and the Korean won declined 1.2 percent to 1,169 per dollar. Commonwealth Bank of Australia recommended buying Australia’s currency on declines in a note released today, describing Dubai’s payment delay as a “storm in a teacup.”

The United Arab Emirates, which is forecast to return to its long-term average current account surplus of 13.7 percent of gross domestic product, probably won’t let the investment company default, wrote Richard Grace, chief currency strategist in Sydney for the bank.

“Dubai has prompted a wave of risk aversion globally,” said Mitul Kotecha, head of global foreign-exchange strategy at Calyon in Hong Kong. “This might prompt a short sell-off in the won but I think that’s what it will be. It’s not going to be a huge fallout because Asia looks more solid in terms of fundamentals.”

Asia bond risk climbed today. The Markit iTraxx Japan index jumped as much as 23.5 basis points, according to Morgan Stanley. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan added 9 basis points to 126 basis points in Hong Kong, according to ICAP Plc.

Crude oil dropped 2.7 percent to $75.87 a barrel in New York and is poised for a weekly decline. Gold for immediate delivery fell 0.2 percent to $1,186 an ounce. Copper in London gained 0.3 percent to $6,841 a metric ton after slumping 2.4 percent yesterday.

Sensex falls over 451 points on Dubai's debt worries

The Bombay Stock Exchange benchmark Sensex on Friday tumbled over 451 points in early trade on hectic selling by funds in line with weak global cues and concerns over Dubai's debt.

The Sensex, which had witnessed two big losses this month, tumbled 451.63 points to 16,403.30 points in the first ten minutes of trading, according to PTI.

Similarly, the wide-based National Stock Exchange index Nifty dropped by 140.50 points to 4865.05 points.

Brokers said the selling focus was more on banking and realty stocks after Dubai's debt problems revived concerns about the global financial system and rattled markets across Europe and Asia.

Dubai is shaking investor confidence across the Persian Gulf after it sought a six-month reprieve on debt payments that risked triggering the biggest sovereign default since Argentina in 2001. The move caused a drop on world markets on Thursday and raised questions about Dubai's reputation as a magnet for international investment.

In Europe, the FTSE 100, Germany's DAX and the CAC-40 in France opened sharply lower. Earlier in Asia, the Shanghai index sank 119 points, or 3.6%, in the biggest one-day fall since August 31. Hong Kong's Hang Seng shed 1.8%. Wall Street was closed for the Thanksgiving holiday and most markets in the Middle East were silent because of a major Islamic feast.

Stocks, bonds and currencies fell across developing countries. The MSCI Emerging Markets Index of stocks dropped 1.1%, led by declines in China and Russia.

The fallout came swiftly after Wednesday's statement that Dubai's main development engine, Dubai World, would ask creditors for a standstill on paying back its $60 billion debt until at least May. The company's real estate arm, Nakheel -- whose projects include the palm-shaped island in the Gulf -- shoulders the bulk of money due to banks, investment houses and outside development contractors.

In total, the state-backed networks nicknamed Dubai Inc are $80 billion in the red and the emirate needed a bailout earlier this year from its oil-rich neighbour Abu Dhabi, the capital of the United Arab Emirates.

``Nakheel is now standing on the brink of failure given the astonishing amount of cash Dubai would have to inject into it in order to see the enterprise survive,'' said Luis Costa, emerging-market debt strategist at Commerzbank AG in London. ``Events like this are a perfect storm.''

``Dubai's standstill announcement ... was vague and it remains difficult to discern whether the call for a standstill will be voluntary,'' said a statement from the Eurasia Group, a Washington-based research group that assesses political and financial risk for foreign investors interested in Dubai. ``If it is not, Dubai World will be going into default and that will have more serious negative repercussions for Dubai's sovereign debt, Dubai World and market confidence in the UAE in general,'' the statement added.

``There is nothing investors dislike more than this kind of event,'' said Norval Loftus, the head of convertible bonds and Islamic debt at Matrix Group Ltd. in London, which manages $2.5 billion of assets including Dubai credits. ``The worst-case scenario will of course be involuntary restructuring on the Nakheel security that brings into question the entire nature of the sovereign support for various borrowers in the region.''

Moodys Investors Service and Standard & Poor's cut the ratings on state companies yesterday, saying they may consider state-controlled Dubai World's plan to delay debt payments a default. The sheikhdom, ruled by Sheikh Mohammed Bin Rashid Al Maktoum, borrowed $80 billion in a four-year construction boom that reduced its reliance on falling oil supplies and created the region's tourism and financial hub.

``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, head of emerging-market research at Toronto-based RBC Capital Markets.

``It's very important to resolve this in a way that will minimize contagion across the region,'' Matrix Groups Loftus said. The moot question is whether that will be possible.

In Europe, the FTSE 100, Germany's DAX and the CAC-40 in France opened sharply lower. Earlier in Asia, the Shanghai index sank 119 points, or 3.6%, in the biggest one-day fall since August 31. Hong Kong's Hang Seng shed 1.8%. Wall Street was closed for the Thanksgiving holiday and most markets in the Middle East were silent because of a major Islamic feast.

Stocks, bonds and currencies fell across developing countries. The MSCI Emerging Markets Index of stocks dropped 1.1%, led by declines in China and Russia.

The fallout came swiftly after Wednesday's statement that Dubai's main development engine, Dubai World, would ask creditors for a standstill on paying back its $60 billion debt until at least May. The company's real estate arm, Nakheel -- whose projects include the palm-shaped island in the Gulf -- shoulders the bulk of money due to banks, investment houses and outside development contractors.

In total, the state-backed networks nicknamed Dubai Inc are $80 billion in the red and the emirate needed a bailout earlier this year from its oil-rich neighbour Abu Dhabi, the capital of the United Arab Emirates.

``Nakheel is now standing on the brink of failure given the astonishing amount of cash Dubai would have to inject into it in order to see the enterprise survive,'' said Luis Costa, emerging-market debt strategist at Commerzbank AG in London. ``Events like this are a perfect storm.''

``Dubai's standstill announcement ... was vague and it remains difficult to discern whether the call for a standstill will be voluntary,'' said a statement from the Eurasia Group, a Washington-based research group that assesses political and financial risk for foreign investors interested in Dubai. ``If it is not, Dubai World will be going into default and that will have more serious negative repercussions for Dubai's sovereign debt, Dubai World and market confidence in the UAE in general,'' the statement added.

``There is nothing investors dislike more than this kind of event,'' said Norval Loftus, the head of convertible bonds and Islamic debt at Matrix Group Ltd. in London, which manages $2.5 billion of assets including Dubai credits. ``The worst-case scenario will of course be involuntary restructuring on the Nakheel security that brings into question the entire nature of the sovereign support for various borrowers in the region.''

Moodys Investors Service and Standard & Poor's cut the ratings on state companies yesterday, saying they may consider state-controlled Dubai World's plan to delay debt payments a default. The sheikhdom, ruled by Sheikh Mohammed Bin Rashid Al Maktoum, borrowed $80 billion in a four-year construction boom that reduced its reliance on falling oil supplies and created the region's tourism and financial hub.

``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, head of emerging-market research at Toronto-based RBC Capital Markets.

``It's very important to resolve this in a way that will minimize contagion across the region,'' Matrix Groups Loftus said. The moot question is whether that will be possible.

Is it just a real-estate related problem confined to Dubai?

The shock waves emanating from Dubai World’s attempt to reschedule its debt rocked global equity markets on Thursday. The fear was all the more because Dubai World is state-controlled, which means that effectively it’s the government that is asking for more time to repay.

Is Dubai another canary in the coal mine, just as Iceland was at the beginning of the crisis, or is it just a real-estate related problem confined to Dubai?

It’s true that Dubai’s problems stem from the surreal happenings in real estate there, with the place being home to the world’s tallest tower and the biggest man-made islands. Real estate prices have fallen by around 50% in the sheikhdom and are expected to continue to fall.

At the same time, the debt restructuring is a clear signal that there are still lots of buried mines out there and it’ll be a long time before the world economy will be out of danger.

Moreover, many of the economies and banks in the West continue to be on life support and their capacity to weather shocks is much diminished.

Matters are not helped by the fact that many international banks have lent heavily to Dubai, banks that are still in a vulnerable position and need to raise capital.

But if Dubai was a real estate bubble waiting to burst, other emerging markets, too, are overextended. Analysts have been warning about Eastern Europe, with their high foreign currency borrowings and dependence on exports.

Emerging market stocks have moved up sharply and are priced for perfection. Any disappointments or shocks could send them down. The dollar carry trade, too, can be a double-edged sword—any spike in risk aversion and the dollar will strengthen and leveraged bets on emerging markets will be wound down.

To be sure, Dubai’s problems may be entirely local. But Vietnam, another darling of emerging market investors, is also facing problems. And finally, while Dubai may be facing severe overcapacity in housing, China, the big daddy of all emerging markets, is also facing overcapacity in a host of industries, made worse by huge growth in credit.

In short, the Dubai World shock is a reminder of the substantial risks in today’s markets.

Dubai debt crisis - Fears of a potential default

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.

Reliance Industries Bonus, Buy now or not !

Reliance announced a bonus issue of 1:1. Dividends were declared at Rs 13 per share. Whats changed?
During the years ended 31 March 2009 to 2003, Reliance has delivered earnings of Rs 103, Rs 135, Rs 83, Rs 68, Rs 54 and Rs 37 for a six year average of Rs 80 and a six year median of Rs 75.56. During this period dividends have been Rs 13, Rs 13, Rs 11, Rs 10, Rs 7.5, Rs 5.25 for a six year average of Rs 10.50 and a six year median of Rs 9.96. The long term payout ratio is 12.5%. Based on the long term payout ratio of 12.5%, a long term growth rate of 12% (in line with India long term GDP + Inflation expectations), I would value the stock at Rs 1,850 for an investor looking for an annualized return of 16% per annum.
Why the excitment about the bonus? After all if a company has 100 shares in issue and has a market cap of 100, it is worth 1 per share. Double the shares to 200 and all that happens is that shares become worth 0.50 each. But a bonus does have some interesting implications.
The first is that halving of the share price will make it more liquid; this tends to attract more buyers and results in stronger prices.
The second is that in India, normally the dividend per share is not cut following a bonus issue; which means the yield doubles. Suppose the Pre Bonus Share value is Rs 2,000 with a dividend of Rs 13. Post bonus you have 2 shares worth Rs 1,000 each with a total dividend of Rs 26. So thats an improvement.
Thirdly is understanding what the company is implying with the bonus issue. What Reliance is telling us is most interesting; it is saying that we expect a dividend of Rs 26 (per pre bonus share) to reflect a payout of 12.5% over the long term; they are expressing confidence in achieving median earnings over the next cycle of Rs 208. Now this is big news; if they achieve this, 6 years out Reliance shares could command a value of Rs 5,096 (i.e Rs 2,548 post bonus value); that is the value based on the long term payout ratio of 12.5%, a long term growth rate of 12% (in line with India long term GDP + Inflation expectations), for an investor looking for an annualized return of 16% per annum.
What the bonus means can differ for people. Some might view it as Reliance saying there are limited growth opportunities and so we are raising our long term payout ratio to 25%. My own view is that Reliance will maintain its 12.5% long term payout ratio; the journey for Reliance lies ahead not behind the company.
Reliance is a strong long term buy and persons other than buy and hold investors, can look for an exit value of over Rs 5,000 by 2014.

Reliance Industries Ltd Sponsored 144A Gdr equals 2 shares in Reliance Industries. It is lightly traded on the pink sheets and for that reason, it is not a GDR I would recommend to anyone other than a buy and hold in perpetuity investor. However exposure to the stock can be acquired via ETF's which have considerable exposure to RLNIY; and of course non resident Indians (NRI's) can buy the shares directly on the Indian National Stock Exchange or the Bombay Stock Exchage.

Source : StockTalks