Sun, Nov 29, 2009 page11

• Dubai crisis may end in a ‘major’ default: analysts

  • BLOOMBERG AND AP
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  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 US$59 billion of liabilities, will add to the US$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 1:55pm in New York, extending this week’s decline to 2.6 percent.

  “In a best-case scenario, this will remain limited to a Dubai corporate sector problem, with either some bailout from UAE [United Arab Emirates] authorities or a market-friendly debt restructuring,” they wrote.

  The UAE has total debt amounting to US$184 billion at the end of this year, according to estimates by Bank of America, which said the region faces a heavy redemption schedule until 2013.

  Of the US$184 billion UAE debt, Dubai holds US$88 billion, while Abu Dhabi accounts for US$90 billion. Bank of America said the debt servicing cost would be higher than these estimates as their numbers only include the principal payments.

  The bank said Dubai faced almost US$50 billion of debt amortization in the next three years: US$12 billion next year, US$19 billion in 2011 and US$18 billion in 2012.

  “We estimate the total debt for Dubai World as US$26.5 billion, 80 percent of which needs to be paid back in the next three years,” the bank added.

  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.

  Moody’s also said on Friday that ratings on banks in the UAE were already on review, and that no immediate downgrades are expected in light of Dubai’s debt crisis.

  The banks with significant exposure to the city-state’s crisis were already on review or carried a negative outlook on their deposit ratings, Moody’s said in a release.

  Moody’s said if the repercussions remain confined to exposures to Dubai World and its subsidiary, Nakheel, banks in the UAE would likely be able to absorb any fallout.

  The UAE banks that are already on review for downgrade are Emirates NBD, Mashreqbank and Dubai Islamic Bank. All are based in Dubai.
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