A possible debt default from Dubai (which I'm called the DDD) has recently shocked the financial markets around the world. Dubai is one of the seven emirates and the most populous state of the United Arab Emirates.
The panic button has been hit again as Dubai "said last Wednesday it would ask creditors of state-owned Dubai World and Nakheel to agree to a standstill on billions of dollars of debt as a first step towards restructuring" (CNBC). Dubai has a bond maturity it has to pay very shortly.
Just as we thought the green shoots were growing exponentially, Dubai has come back to show us that not all that much has changed.
The panic comes form the fact that banks in Europe and Asia may have substantial exposure to Dubai. Given that most of the banks in Europe have barely recovered from the crisis last year, a hard hit from sovereign debt defaults could create problems. Additionally, a default by Dubai and other countries in trouble such as Greece would lead to the trigger of the credit default swaps written on their respective debt. Just imagine if the sellers of the credit default swaps (think AIG) fall into trouble because they are not in position to pay their liabilities.
As expected, the financial rating agencies Standard and Poor's and Moody's have decided to downgrade the Dubai debt after....AFTER....the country released it's statement asking for a debt restructure. Not quite what you would call "ahead of the curve". [You can find the two statements here: S&P, Moody's.] In theory, these agencies were "technically" suppose to have analyzed something funky before hand and made a call before the statements...right? Otherwise, what's their edge against me?
As mentioned above, Dubai is not the only country on fire. The Greece stock market was down by around 7% last Thursday and their credit default swap widened by 212 basis points. It seems like all the problems from Eastern European countries may be popping back again in the world stage as Dubai takes the lead.
However, is someone going to save them? And if so, who are the lucky winners? Will European countries step in and pump more money or will a purely private business settlement take place ? (as in whether the banks will extend the maturity date without government guarantee etc). I'm expecting a happy ending to this problem, but you never know.
And things just got exciting again...
...and, as we can see, just because you create you own islands doesn't mean anything!
