27th November Dubai World overview
27th November 2009
Macro- Overview
Focus on Dubai
The last two days has seen news that Dubai World (the investment company owned by the state of Dubai) asked its creditors for a freeze on the repayment of debt. This effectively has raised concerns of a potential state default. Global risk trades have taken a battering with equities, commodities and high yielding carry trades have taken significant hits.
Thoughts from the trading floor
The main unit within Dubai World’s portfolio, Nakheel PJSC has debt repayments of around $3.52 Billion due on 14th December and the company looks “dead in the water”. The failure of Dubai State to be able to meet these obligations is quite a clear indication that the State may be heading for bankruptcy. The last decade had seen amazing infrastructure growth in Dubai, fuelled by cheap credit availability and Sheikh Maktuom’s desire to build Dubai into a global commercial centre. Dubai and its decadence had become a reflection of the world of finance of this time. The global credit crunch and the collapse in real estate prices has hit Dubai particularly severely, due to its dependence on real estate and cheap credit.
The question now, which is hurting risk appetite the most, is who is exposed to the most? Key UK banks such as HSBC, RBS, Standard Charter, and Lloyds Group are touted to have significant exposure (the British considered Dubai to be a real estate safe-haven). Most likely many banks globally are caught with exposure, despite many denials (as they did during the subprime crises). Therefore, as with the subprime mortgage crises, the contagion effect is more important the direct material exposure to Dubai World. As we have seen in the recent 2 years big credit events will affect banks that may not have superficial exposure to the main problem. If the Dubai contagion does spread, causing a credit default event across the whole Gulf peninsula and banks have to write down real estate asset prices, the “price discovery” of these assets has the potential to cause significant write downs of real estate assets globally. This has been something that banks have been attempting to avoid of late, the discovery of true value of Commercial Real estate. Also, we must consider that many banks have been using CRE securities as collateral to borrow from the Fed and the ECB. This could mean that these central banks are sitting on a time-bomb of poor assets. With the US, in particular, struggling with its fiscal deficit, can it afford to have more holes blown into its balance sheet?
Bull View
The bulls hope that this event passes quickly, and the fall in global risk assets has just been accentuated by thin volumes. They will hope that the situation can be resolved through a bailout by Abu Dhabi and possibly the Saudis. With respect to this, a steep fall in global risk assets may provide the perfect buying opportunity for a year end rally.
Bear View
The bears will see this as the start of a new “perfect storm”. Global financial institutions are still reeling from the 2008/09 bear market, and have significant exposure to poor quality securitised debt. The risk lies in this event sparking the start of a new downward leg for global risk. With governments around the globe crippled with debt, help may not be available this time round.
Futex View
We favour the bears currently. For weeks we have been wary of the rally in global risk and the over optimism shown by markets. The fact is that the last decade of debt “binge” will continue to weigh on the global economy as the imbalances that have been built up over this time have not corrected themselves. Instead these imbalances, such as the debt owed by developed countries have increased. This event may not be the final “nail in the coffin” for global finance; however we are getting close to “sealing the coffin”.
July 18th, 2010 at 2:58 pm
Fantastic the euro front, at last the EU managed to get above 1.30.