Dubai Default Worries Infect Markets

On November 25, 2009, on the eve of the Eid holiday, Nakheel, the Dubai World-owned property developer asked for a payment delay ahead of its December 14 maturity date, which is viewed as a technical default by many investors. Its parent, state-owned Dubai World, has US$59 billion in liabilities, a significant amount of the total estimated US$80-100 billion in Dubai’s liabilities. So far in 2009, all the maturing government-linked debt has been paid off in full, with government funds making up any shortfall in private funds. Yet, given the vulnerabilities of the property sector and challenges of the economic model, Nakheel could be a different story given the government’s desire to support only viable companies. The lack of transparency about corporate and national finances and which debt might be honored, is adding to uncertainty and credit risk. Despite investor concerns, sales of domestic assets will be impossible until November 30 due to the Eid holiday. If confidence in Dubai’s financial management is adversely affected, other bonds may also be sold off. In addition to sending Dubai’s CDS spreads up 100 basis points, to levels higher than those of Iceland, the uncertainty has infected the CDS spreads of Abu Dhabi and has been cited as an explanation for the 2% plus corrections in European asset markets, some of which were already worried about European debt defaults. Dubai-exposed banks were most affected as were EMEA FX assets.