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Saturday, July 27, 2013

Dubai’s Crisis: Implications for Stocks and Global Markets



November 30, 2009 by · Leave a Comment 

Key Points

The biggest near term influence on the direction of risk appetite and global markets appears likely to be the Dubai debt crisis, so we need to evaluate the importance of this past week’s credit scare.

The request to delay repayment on its loans by Nakheel (a real estate development arm of Dubai’s development fund Dubai World) confronts markets with what is potentially the largest sovereign default since the 2001/2002 when Argentina stopped payments on its government bonds. The Dubai default threat does not have the same fundamental complexities as its Argentina’s did, however, context and timing can be everything.

Given that markets are:

  • Sitting atop an extended rally on questionable fundamentals and valuations
  • Nervously remembering how two years ago, a supposedly containable US real estate default crisis metastasized into a near worldwide financial and economic collapse from which they are still trying to recover

A far more dramatic response from the dollar and nearly every other asset class is quite conceivable, thank you.

Market concerns include:

  • There could be “contagion”-type effects that could affect the creditworthiness of related entities, particularly those that have lent to Dubai World. Most of those are either UAE-related or European banks. This isn’t a huge issue, unless it becomes a big European issue — unlikely, but remember that European banks are even more levered than US banks. It’s believed that UK’s RBS, HSBC (HBC), Barclays (BCS), Lloyds (LYG) and Stand Chartered are having large exposures in case of defaults. Who would be affected if these were undermined?

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