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Dubai: Floating on an Island of Debt
- Abu Dhabi
- CDS
- Commercial Real Estate
- Credit Crisis
- Credit Default Swaps
- Credit-Default Swaps
- Creditors
- default
- Deutsche Bank
- Dow Jones Industrial Average
- Dubai
- Dubai World
- Foreclosures
- Green Shoots
- Gross Domestic Product
- headlines
- Housing Market
- Iceland
- Ireland
- Japan
- JPMorgan Chase
- Las Vegas
- Lehman
- Lehman Brothers
- Mortgage Bankers Association
- Nakheel
- Real estate
- Recession
- recovery
- Sovereign Default
- Subprime Mortgages
- Transparency
- TREPP
- Unemployment
- United Kingdom
- Yen
By Economic Forecasts & Opinions
Stock markets around the world cracked on Friday with the Dow Jones industrial average down more than 150 points (Fig. 1), and commodities plunging as Dubai debt woes unnerved investors, and sent tremors of uncertainty throughout all markets.
The crisis flared after Dubai, a part of the United Arab Emirates (UAE) federation, asked to delay interest payment for six months on $60 billion of debt issued by the state-run conglomerate Dubai World and its main property unit Nakheel.
Concerns that a government-backed investment company risked default ripped through world markets. Investors read it as a sign of yet another sovereign implosion after Iceland and Ireland, and recoiled from risk and piled into dollars.
Las Vegas on Steroids
Dubai World has served as Dubai's main driver of growth, operating ports, transportation groups, spearheading real-estate & infrastructure projects both at home and abroad. Its real-estate subsidiary Nakheel built Dubai's iconic palm-tree-shaped island, packed with luxury villas and hotels, many still under construction. Real estate and construction accounts for about 23% of Dubai’s GDP.
With little oil, Dubai financed much of this rapid real estate development with debt. After incurring its estimated $80-$90 billion of debt in a four-year construction boom to transform its economy into a regional financial and tourism hub, Dubai suffered the world’s steepest property slump in the first global recession since World War II.
Deutsche Bank estimates that Dubai’s property prices, both commercial and residential, have halved since August last year, and could fall a further 15-20% this year.
U.S. Banks Less Exposed
Most analysts believe U.S. banks are probably less exposed than European rivals to a potential debt default by Dubai World, but a lack of transparency and the interconnection of the modern financial system make it difficult to know which institutions are ultimately exposed.
Dubai World's largest creditors are reportedly domestic banks in Dubai and Abu Dhabi. MarketWatch noted data from the Bank for International Settlements which put cross-border banking exposure for the UAE as a whole at $123 billion at the end of June. Of that total, European banks hold 72%, with the United States and Japan only holding 9% and 7% of the exposure, respectively. The United Kingdom is by far the biggest creditor with a share of 41%.
Reminder of Other Risks
On a global scale, Dubai World's debt problem seems relatively minor, but it illustrates the impact from one tiny country in an increasingly interconnected world. The Dubai news also cast doubt over the strength of the U.S. economic recovery, and the prospects for a bottoming of property prices.
Commercial Real Estate
As pointed out in my previous article that the commercial real estate sector posed a much greater threat than the over-hyped “mother of all carry trades.” The Dubai debt crisis further reinforces this viewpoint.
The potential for contagion from Dubai's debt woes could further unhinge an already fragile U.S. commercial real estate sector, whose values have already fallen 42.9% from their 2007 peak, close to the lowest since 2002, according to Moody's. (Fig. 2) The latest Moody's projection is for prices to bottom at 45-55% below their peak, but could drop as much as 65% from their peak in a "stress case".
As commercial property values fall, debt defaults rise. The $3.4 trillion outstanding in debt backed by commercial real estate poses a real threat to the recovery. Trepp LLC reported that last month, delinquencies on U.S. commercial real estate loans that were packaged into commercial mortgage-backed securities reached 4.8%, more than six times the year earlier level. Hotel loans, at 8.7% distressed, have begun falling into delinquency faster than any other kind of commercial real estate debt.
Write-downs and losses at banks around the world have risen to more than $1.7 trillion since 2007 as the credit crisis undermined the value of assets owned by financial institutions, according to data compiled by Bloomberg. Any further deleveraging and the resulting credit tightening from commercial real estate would impede the financial sector and probably derail the U.S. economy sending it into another recession.
Housing Market Mortgage Crisis
So far, the appearance of recovery in the housing sector is being driven primarily by reduced prices combined with federal programs to lower mortgage rates with the goal of bringing more buyers into the market.
Based on a study released by Zillow.com, the foreclosure crisis has moved beyond subprime mortgages and into the prime mortgage market. (Fig. 3) While subprime borrowers are still a factor in the current foreclosure epidemic, it's becoming increasingly apparent that the weak labor market is the driving force behind the mortgage crisis we face today.
According to the Mortgage Bankers Association, one in seven U.S. home loans was past due or in foreclosure as of Sept. 30, putting that quarterly delinquency measure at its highest level since the report’s inception, 1972, and up from one in ten at the beginning of the year.
The continued surge in delinquencies suggests that a recovery in the housing market could be hindered by the weak job market as well as by further fallout from the easy money and loose lending practices of the past. The foreclosures and delinquencies are expected to keep rising well into 2010, not leveling off until the unemployment rate starts to moderate.
In a study by First American CoreLogic found that one in four of all U.S. mortgage-borrowers owe more than the value of their properties in the 3rd quarter. And many experts didn't expect U.S. home prices to hit bottom until early 2011, perhaps falling another 5-10%, as more foreclosures get pushed onto the market.
Negative equity is another outstanding risk hanging over the mortgage market.
Dubai Is No Lehman
The circumstances behind Dubai's moves are murky, making it hard to gauge the exact risk to the pertaining bonds and Dubai's own general creditworthiness. UBS cautioned that Dubai's overall debt "might be higher than the generally assumed $80 billion to $90 billion, due to potential off-balance sheet liabilities. These could include unlimited and unquantifiable amount of credit default swaps (CDS) and other derivatives against the underlying assets, and once unraveled, could potentially erupt into a subprime-like crisis.
The current expectation; however, is that there's a good chance that Dubai's problems will probably prove a local issue. Most likely, Dubai, or its neighboring emirate, Abu Dhabi, won't risk tarnishing their images and reputation further, and will come up with a reasonable resolution.
Even if Dubai goes into sovereign default, the amount is probably not enough on its own to threaten the financial system since any actual losses would be a fraction of the total. So, the problems in Dubai are unlikely to be as serious as last year's Lehman Brothers collapse, nor is it a reflection on the ability of emerging markets to lead a global economic recovery.
Rational Expectations?
But Dubai could well spur a broader crisis of investor confidence in overly leveraged economies as market confidence world-wide is still fragile from the severity of the financial crisis. The debts of many emerging markets have risen even further as the countries governments have fought the ravages of the global recession by issuing more stimulus debt to fill the gap voided by private investment.
The spread of credit-default swaps on developing-nation’s bonds jumped 14 basis points after the Dubai news broke, the most in a month, to 3.24 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index. There is also a clear sign of potential contagion effects of global risk aversion on basically all risky assets, with the dollar and yen being the prime beneficiaries.
Rational expectations or not, for now, the Dubai crisis is simply a reminder that the severe global recession has relegated much debt to near junk status, and there still remains a high degree of uncertainty as to the percentage recoverable on all outstanding debt which is going to be coming due over the next 5 years.
Despite some seminal signs of green shoots in the news headlines during this 9 month liquidity driven rally in many asset classes around the globe, we should be reminded that all that glitters is not gold, and that the global economic recovery is still on shaky ground.
# "I know the odds are against me, but if there's a win I'm gonna find it!" ~Goku #
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I expect soon we'll be referring to it as Abu Dhabi Dubai ;)
Or - Jaba Dhaba Dubai.....
Or: Jaba Dhaba Dubai...
Danske Bank on Dubai: “Major Bank Losses” in 2010 (and perhaps also 2011)
From Danske Bank’s Weekly Focus:
“It underlines the concequences of the credit crisis for the global financial system can still surprise investors. In our view, the risk of a retreat in the equity markets in the coming quarters has increased precisely because there will very likely be major losses on bank loans when we move into 2010.”
”The reason for our concern about the bank sector is that there will probably be more Dubai-like cases in 2010. And unlike 2009, it will be difficult for banks to earn on the swings what they lose on the roundabouts. In other words; investment returns will not reach 2009 levels, while loan losses will continue to rise in 2010, and perhaps also in 2011.”
“Dubai World is in our opinion a warning of tougher times for bank equity performance and earnings ability in the new year.”
Full report: "A Greek tragedy in Dubai"
Update on a Pound poem:
In a station of the Dubai metro
The apparition of these faces in the crowd;
Palm fronds on a wet dream in the desert.
http://dubaiworld.wordpress.com/category/dubai-metro/
Here is the big question: Why wasn't Dubai debt downgraded earlier?
Because the issuers kept paying for the ratings.
Now you are on target.
First the Constitution provided for the formation of
the Government to provide basic services and to
provide a common currency. Then the rating agenices
deciided they too should print a common currency. As
long as buyers would consider this paper of equality
we have created the stamdard for an "agreement to
barter." And so we have it, the rating agencies
get to print money becasue two parties agree to
accept it.
How intersting that these faux currencies arent
figured into the money supply.
Dubai is yet another data point:
true profits to economic activity have fallen. Real yields on economic behavior are declining.
In the latter stages we will see enormously stupid and large projects built on huge leverage in order to try to eke out relatively minor profit margins that would be magnified by the massive leverage ratios.
This dovetails with the EROI discussions on oil and energy supply over on TOD and elsewhere. Global EROI is falling. Whereas one giant well back in the 1940s would gusher, now we are drilling under 20000' of ocean and 3mi of rock to get a field with a rate of return on investment 1/30th as good. We are digging up sands and washing them using energy, everything we're DOING (which revolves around energy) is now delivering FAR LESS return on investment.
Against this backdrop, declining gov yields would actually be expected even in the face of obvious insolvency. Every piece of economic activity now is marginally profitable but trying to deliver return using leverage. But money floods cannot turn unprofitable activities into profitable ones, not so long as money ostensibly denominates something real.
This apparent paradoxical trend will proceed straight into a true Rogue Wave dislocation when faith in paper is abandoned. Promises about what you "can do" in the future to pay interest claims will be laughed at because a collective realization of a future of LESS instead of growth/more will set across the landscape like the first snowstorms of winter.
This is the origin of the "Liquidity Trap" of economists because they do not understand how real systems work. Their axiom is that more money leads to more economic activity. But more money cannot improve energy EROI or the ROI of any other real activity. Someone must take the loss somewhere or else the money isn't real. This is the final checkmate coming
+ 1
Only some asshat Texan/Canadian 'tard could come up with a tar sands scheme.
Housing hits bottom when more than 50% of people can afford to buy a home and investors can purchase property and rent it out for a reasonable profit. We need to fall 20% in CA for this case to be tested.
Dubai debt is not the issue. As CNBC noted with their limited intellectual and analytical ability the amount at risk in Dubai is small compared to the funds stolen by Goldman Sachs through the AIG "rescue."
The real issue is that we should be realizing that the great stimulus rescues of the Central Bankers of the world and the alleged rescue by the commercial banksof the worls is failing. Its failing becasue the underlying asset values are faux and these bankers know it. While the central bankers are socializing the obligations the commercial bankers are staying away form the risk prefering to lend the liqidity to the central bankers and avoid the participation of the socialization experiment as put forth by the central bankers.
The bottom line is that the world has too much capacity and lacks end demand. the capacity has to be destroyed or in the alternative we need to cut back to begin to grow again.
The great monopoloies ot land labor and capital have to be broken up. The ever continued focus on EPS has to be balanced with the need for less perfection and the creation of jobs to employ people. Technology is good, but computers dont shop on Black friday.
The monopolization of labor and capital by ever growing conglamorates that provide effeciency through combination and merger may lead us to the Marx prediction of the evolution of Communism as he described the economic process.
Its time to break up Goldman Sachs;JP Morgan and other clearly anti trust entities so as to provide a platform for growth. I beleive that the stratgedy of the Governments trying to gap the destroyed demand by the consumer is a dead stratgedy. demand is shrinking for a reason. Perhaps soften the blow but dont try to turn the train as you will fail. Fake demand will only shift the burden of the expense form the people to the government. This wont work.
Big business can not own the Governemnt as it does in my opinion currently. If we dont change this then big business will end up with all of the chips and all of the other players will have no chips to continue to play the game. AND WE WILL ALL GO BACK TO ZERO.
The global central banks have managed to slo down the arrival of the financial tsunami by printing money and giving an "appearance" of recovery. However, all Ben and company have done in slowing down it's arrival is ensured the waves are even higher and will cause more damage than if he had done nothing.
Ben is writting the check as we speak
"The Ownership Society".
...a wholly-owned subsidiary of the "The Debt Peonage Society".
+1
+1
Didn't CNBC's Jim Cramer say in June 2009 that housing prices had bottomed? Perhaps it is time for ZH to revisit? Perhaps ask for details of any communication between Cramer and the WH Chief of Staff since Jan 2009?
June 3, 2009:
http://www.huffingtonpost.com/2009/06/03/jim-cramer-buy-a-house-no_n_210...
June 16, 2009:
http://www.cnbc.com/id/31388528
No longer is anything as contained (local) as hoped.
The report was a decent read until the last sentence included yet another silly green shoot reference.
Dubai?
No fear, no blame, no problem.
Guess I'll go back to watching "Dancing with the Stars".
And many experts didn't expect U.S. home prices to hit bottom until early 2011, perhaps falling another 5-10%, as more foreclosures get pushed onto the market.
Why are the prognostications invariable ridiculously low?
More realistically we are at the mid point of the decline and can expect a further decrease equivalent to what has proceeded.