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article imageDubai’s dubious debts sink markets

By Paul Wallis     Nov 26, 2009 in Business
It looked like a fairy tale, and the world’s markets now suspect it was one. Dubai’s aura of exclusivity, fabulous architecture and unique construction came at a price. Now, the UAE has suspended debts of a state conglomerate, Dubai World.
The glitz was backed up by charging top dollar. Everybody, from the contractors to the laborers, made multiples of global prices. This was Aladdin’s Upmarket Seaside Resort. That attracted large amounts of overseas investment and credit. The suspension of debt casts a lot of doubt on the viability and value of investments.
Now, a lot of unspecified capital in debt appears to be up in the air. Risk exposure is something finance experts haven’t been psychologically able to mention over a year, and the fear of another wave of dud debts is palpable.
That concept hasn’t enchanted global markets. The world’s stock markets nose-dived emphatically on hearing the news of the Dubai situation. Currency markets also reacted. The Australian dollar, which has been rising for months relative to a weak US dollar, promptly went down. Investors moved into yen, which is a sign of defensive positioning. (It's also playing havoc with the Japanese economy as Japanese foreign equity loses value relative to the yen.)
Even gold went down, marginally and only on spot prices, but the long rising streak came to a screeching halt. Finance stocks took very noticeable hits on principle, despite efforts by banks to tell the world they have no exposure.
Apparently Dubai has reminded the world’s markets that the remains of the high risk pre crash global economy are still very much around and costing money. Even insuring loans in Dubai now costs more than it did yesterday.
When risks are obvious, the result is that hedging and risk aversion cost a lot more, and that’s been another factor weighing on the credit markets of the world.
The actual situation in Dubai is far from clear. Even Bloomberg has been having some difficulty penetrating the total capital situation. It’s known that UAE state entities have $80 billion in debt.
But there are some other situations where “who else is exposed to what” aren’t clear.
For example:
1. There are a stated 40,000 unfinished homes related to the developer which is trying to suspend its debts.
2. The retail value of those homes is well above the debts to the developer.
3. A fall in house prices of up to 70% is a scenario now being considered realistic. There’s a good reason for that consideration: They’ve already fallen 50% since the crash.
4. This means the retail value of equity for owners and investors is now effectively in the subprime range.
The US market has been closed for Thanksgiving. Let’s hope Dubai isn’t the turkey’s revenge.
More about Dubai, Debt suspension, Global credit markets
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