Post by Tal Barak Harift on Nov 28, 2009 6:46:11 GMT 4
Nov. 27 (Bloomberg) -- Dubai’s debt woes may worsen to become a “major sovereign default” that roils developing nations and cuts off capital flows to emerging markets, Bank of America Corp. said.
“One cannot rule out -- as a tail risk -- a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s,” Bank of America strategists Benoit Anne and Daniel Tenengauzer wrote in a report.
A default would lead to a “sudden stop of capital flows into emerging markets” and be a “major step back” in the recovery from the global financial crisis, they wrote.
Emerging-market stocks around the world have slumped for two days on concern a debt restructuring by Dubai World, with $59 billion of liabilities, will add to the $1.72 trillion of losses and writedowns from the global credit freeze. The MSCI Emerging Markets Index fell 1.9 percent to 940.30 as of 1:55 p.m. in New York, extending this week’s decline to 2.6 percent.
Dubai, which borrowed $80 billion in a four-year construction boom to transform its economy into a tourism and financial hub, suffered the world’s steepest property slump in the recession. Home prices fell 50 percent from their 2008 peak, according to Frankfurt-based Deutsche Bank AG.
‘Best-Case Scenario’
“In a best-case scenario, this will remain limited to a Dubai corporate sector problem, with either some bailout from UAE authorities or a market-friendly debt restructuring,” they wrote.
Bank of America estimates that Dubai’s debt totals $88 billion, and that its external debt equals 103 percent of gross domestic product, according to a separate report.
South Korea’s won lost 1.7 percent, the biggest slump among 25 emerging-market currencies, followed by the Philippine peso.
The extra yield investors demand to own developing nations’ bonds instead of U.S. Treasuries swelled 14 basis points, the most in a month, to 3.24 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index.
Dubai’s state-owned companies’ credits were downgraded by Fitch Ratings today, and by Moody’s Investors Service and Standard & Poor’s earlier this week, on concern the government’s ability to support lenders will be constrained after Dubai’s attempt to delay debt repayments.
U.S. Stocks
U.S. stocks fell, joining a global slump that began when American exchanges were closed yesterday, as Dubai’s attempt to reschedule debt rattled investors and drove shares of banks lower. The Standard & Poor’s 500 Index lost 1.7 percent after retreating as much as 2.4 percent in the first 15 minutes of trading.
The U.S. is monitoring closely the developments in Dubai related to an effort by the government’s investment company to delay debt repayments, a Treasury official said.
U.K. Prime Minister Gordon Brown said he and Financial Stability Board Chairman Mario Draghi are confident that Dubai’s debt troubles are “containable.”
To contact the reporter on this story: Tal Barak Harift in New York at tbarak@bloomberg.net
“One cannot rule out -- as a tail risk -- a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s,” Bank of America strategists Benoit Anne and Daniel Tenengauzer wrote in a report.
A default would lead to a “sudden stop of capital flows into emerging markets” and be a “major step back” in the recovery from the global financial crisis, they wrote.
Emerging-market stocks around the world have slumped for two days on concern a debt restructuring by Dubai World, with $59 billion of liabilities, will add to the $1.72 trillion of losses and writedowns from the global credit freeze. The MSCI Emerging Markets Index fell 1.9 percent to 940.30 as of 1:55 p.m. in New York, extending this week’s decline to 2.6 percent.
Dubai, which borrowed $80 billion in a four-year construction boom to transform its economy into a tourism and financial hub, suffered the world’s steepest property slump in the recession. Home prices fell 50 percent from their 2008 peak, according to Frankfurt-based Deutsche Bank AG.
‘Best-Case Scenario’
“In a best-case scenario, this will remain limited to a Dubai corporate sector problem, with either some bailout from UAE authorities or a market-friendly debt restructuring,” they wrote.
Bank of America estimates that Dubai’s debt totals $88 billion, and that its external debt equals 103 percent of gross domestic product, according to a separate report.
South Korea’s won lost 1.7 percent, the biggest slump among 25 emerging-market currencies, followed by the Philippine peso.
The extra yield investors demand to own developing nations’ bonds instead of U.S. Treasuries swelled 14 basis points, the most in a month, to 3.24 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index.
Dubai’s state-owned companies’ credits were downgraded by Fitch Ratings today, and by Moody’s Investors Service and Standard & Poor’s earlier this week, on concern the government’s ability to support lenders will be constrained after Dubai’s attempt to delay debt repayments.
U.S. Stocks
U.S. stocks fell, joining a global slump that began when American exchanges were closed yesterday, as Dubai’s attempt to reschedule debt rattled investors and drove shares of banks lower. The Standard & Poor’s 500 Index lost 1.7 percent after retreating as much as 2.4 percent in the first 15 minutes of trading.
The U.S. is monitoring closely the developments in Dubai related to an effort by the government’s investment company to delay debt repayments, a Treasury official said.
U.K. Prime Minister Gordon Brown said he and Financial Stability Board Chairman Mario Draghi are confident that Dubai’s debt troubles are “containable.”
To contact the reporter on this story: Tal Barak Harift in New York at tbarak@bloomberg.net