World markets were shaken today after the government of the Persian Gulf state of Dubai late last night, New York Time, asked for a six-month delay on payment of debts owed by Dubai World, which is a state-owned holding company involved in a variety of businesses including land development, shipping, and finance. As part of a restructuring of Dubai World, “Dubai World intends to ask all providers of financing to Dubai World to “standstill” and extend maturities until at least 30 May 2010,” the official Emirates News Agency reported on its Web site.
The immediate effect, as the Wall Street Journal reports today, was that debt rating agencies cut their ratings on Dubai’s debt overall, with S&P putting four of Dubai’s biggest banks on credit watch. S&P estimates that Dubai has $50 billion of debt coming due in the next three years, though total Dubai debt is quoted at $80 billion or more by various news outlets.
As Gluskin Sheff analyst David Rosenberg notes in an article this morning, a default by Dubai would be the largest sovereign default since Argentina in 2001.
As Bloomberg notes, Dubai has suffered the most among world real estate markets following a massive development initiative, with home prices falling 50% from last year’s levels.
The secondary effect was that the cost to insure emerging markets around the world against default, the so-called credit default swaps, rose following a jump of 1.3 percentage points on Dubai’s CDS.
And the tertiary effect was to push down global exchanges and to push the dollar to a 14-year low against the Japanese Yen, which it was close to doing on Wednesday anyway. The FTSE 100, tracking the most prominent stocks traded on the London Stock Exchange, fell 3.2%, the Financial Times reported. Banks across Europe with exposure to Dubai’s debt had significant drops, including France’s BNP Paribas, and Germany’s Deutsche Bank, which dropped 3.3% and 5%, respectively.
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