Dubai World once claimed ‘The Sun Never Sets on Dubai World'. Royal Bank of Scotland (RBS), HSBC (HBC), Barclays (BCS), Lloyds Banking Group (LYG), Standard Chartered and ING Groep (ING) would want to believe/or their investors believe that the Sun never sets on Dubai World.
Last Wednesday (November 25, 2009) was a black day for Dubai World or at least its investors. On that fateful day, Dubai World, an investment fund of the Dubai government, requested a six-month delay in $35 billion of debt repayments stoking fears that it could default on its nearly $80 billion of debt. Thankfully, the standstill in debt repayment does not apply to Dubai Ports World, which operates one of the biggest container terminals in the world. But it does include the $4.05 billion due on December 14th to holders of an Islamic bond, or sukuk, issued by Nakheel, a developer responsible for the Palm Islands and other spectacular land-reclamation projects.
Dubai World's announcement triggered risk aversion across the globe.
Source: Markit
European credit and equity markets suffered a torrid session on Nov 26 as the debacle in Dubai sparked a fresh bout of risk aversion. The Markit iTraxx Europe index ended the day at 89.5bp, over 5bp wider than previous day's close. Events in the Middle East have been dominating trading for the last few days. Dubai's spreads continued to widen, reaching 550bp at the close. It was compared to Iceland by some in the media but its current levels have more in common with Latvia, a sovereign dependent on external largesse for its solvency. The handling of the Dubai World restructuring has been an exercise in poor communication. An unnecessary information vacuum has been created, with investors unsure of their positions. The cancellation of a planned teleconference for Nakheel bondholders due to oversubscription was typical of the whole affair.
For the first two days following the crisis, Dubai's wealthy neighbour Abu Dhabi was unwilling to bailout Dubai's avaricious state-owned companies. However, on November 28, a government official in Abu Dhabi told "We will look at Dubai's commitments and approach them on a case-by-case basis.
