http://www.washingtonpost.com/wp-dyn/content/article/2009/11/27/AR2009112701013.html?wpisrc=newsletter
World markets endure knocks
DUBAI CRISIS IS WAKE-UP CALL
Investors weigh risks in emerging economies
By Neil Irwin
Washington Post Staff Writer
Saturday, November 28, 2009
Global markets were jolted in recent days following the threat by a state-owned
company in Dubai to default on its debt, as investors reawakened to the risks
posed by mammoth debts in developing economies.
Dubai World, an investment company weighed down by real estate losses, asked
creditors this week to accept delayed repayment. That led investors to doubt
the financial reliability of nations even beyond the Arab world, deflating
stocks in emerging markets by 2.1 percent.
Officials in Washington and European capitals continued to closely monitor
financial markets Friday, worried that the Dubai debt problem would spiral into
a global crisis. But those fears dissipated during the day as markets in the
United States fell modestly, with the Standard & Poor's 500-stock index off 1.7
percent. European markets gained Friday, following steep losses Thursday, when
American markets were closed for the Thanksgiving holiday.
While most analysts predict that a solution will ultimately be found for
Dubai's debt, the unexpected events have highlighted lingering hazards that
could imperil a global economic recovery. Despite a boom in financial markets
over the past eight months and a return to growth across much of the world,
many nations still face a vast overhang of debt from the boom years.
"The actual losses out of Dubai may be fairly limited, but it shows that we're
not out of the woods, yet," said Rachel Ziemba, a senior analyst at Roubini
Global Economics who tracks the Middle East. "We may be out of recession, but
some of the underlying fundamentals that caused the credit crisis, those still
remain."
There has been an outright boom in stock markets around the world in recent
months, with valuations of emerging market stocks up more than 100 percent
since March 2. But this week's events are forcing investors to revisit the
risks that still lurk.
Besides a threat of default in Dubai, the Greek government is grappling with a
fiscal crisis, and several Eastern European governments increasingly appear in
perilous financial shape, including Hungary, Poland and the Baltic states.
Western European banks have lent heavily in those nations, meaning any collapse
could send tremors across the continent. Moreover, Vietnam devalued its
currency, the dong, by 5 percent Wednesday, aiming to prop up its rapidly
growing export industries but causing new tensions with other Asian nations
that also depend heavily on exports.
While the threat of default by Dubai World may be little more than a
negotiating strategy, the events have underscored the inherent uncertainty of
investing outside the industrialized world.
"This will bring attention to the risks that remain by being overly exposed to
emerging countries," said Bernard Baumohl, chief global economist at the
Economic Outlook Group. "What we might see in the next few weeks is more
differentiation between emerging countries that took on too much debt, versus
those with truly stronger economies, which are on a much better footing."
Dubai, one of seven princely states that make up the United Arab Emirates, is
weighed down by massive overinvestment in glitzy real estate projects, and the
bill is just beginning to come due. Aiming to be the predominant financial and
commercial center of the Middle East, the government has invested heavily in a
jaw-dropping array of hotels, resorts and office towers that make Las Vegas
seem quaint by comparison. Among the attractions: An indoor ski slope and a
manmade island shaped like a palm tree.
Dubai World funded much of that investment boom and is among the world's
largest investment groups. It made U.S. headlines in 2006 when one of the
companies it owns, Dubai Ports World, was set to manage American ports -- but
had to back off after a popular outcry over possible security concerns.
Investors have long assumed that the government of Dubai would ultimately back
Dubai World's $60 billion in debt, rather than allow it to default. That
assumption allowed the company to borrow at cheaper rates than it would have
otherwise.
But late Wednesday, the company, which has suffered steep losses in its real
estate subsidiary Nakheel, asked creditors to allow it to delay any payments
until May 30 while it restructures its operations. Nakheel, which was
responsible for many of the city-state's most elaborate construction projects,
has a $3.5 billion bond coming due Dec. 14. The request for a repayment delay
undermined investor faith that the government would back the firm.
The company's appeal for a standstill agreement was disclosed in a terse
announcement followed by little official explanation. The resulting confusion
was compounded by the difficulties of communication during holidays in both the
Muslim world and the United States.
Analysts said they suspected the situation would ultimately be resolved without
the company defaulting. They think it unlikely the government of Dubai would be
willing to suffer such a hit to its reputation. And Abu Dhabi, another emirate
that is flush with oil wealth, might yet bail out Dubai, perhaps partnering
with other wealthy Gulf nations.
Some European banks have done extensive lending to Dubai, and analysts name
British firms HSBC and Standard Chartered as those with the greatest exposure.
American banks have less involvement; Citigroup has about $1.9 billion in
exposure, small relative to the size of the bank.
"Dubai is very much a reminder that the lingering effects of the credit bubble
are still with us," said Barry Knapp, of U.S. equity investments at Barclays
Capital. "While there no real direct linkages to U.S. markets and our direct
exposure is small, we have plenty of our own bad debts in the U.S."
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