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Is Dubai's Sovereign Risk Overblown?
- Abu Dhabi
- Barack Obama
- China
- Credit-Default Swaps
- Creditors
- default
- Dubai
- Dubai World
- European Union
- Global Economy
- Great Depression
- Gross Domestic Product
- Istithmar
- Las Vegas
- MGM Mirage
- Nakheel
- non-performing loans
- Sovereign Default
- Sovereign Risk
- Sovereign Risk
- Standard Chartered
- Stimulus Spending
- Unemployment
- Yuan

Submitted by Leo Kolivakis, publisher of Pension Pulse.
Laura Cochrane and Tal Barak Harif of Bloomberg report that Dubai Debt Delay Rattles Confidence in Gulf Borrowers:
Dubai
shook investor confidence across the Persian Gulf after its proposal to
delay debt payments risked triggering the biggest sovereign default
since Argentina in 2001.
The cost of protecting government notes
from Abu Dhabi to Bahrain rose, extending the steepest increase since
February as Dubai World, with $59 billion of liabilities, sought a
“standstill” agreement from creditors. Its debt includes $3.52 billion
of bonds due Dec. 14 from property unit Nakheel PJSC. Dubai
credit-default swaps climbed 90 basis points to 530 after yesterday
increasing the most since they began trading in January, CMA Datavision
prices showed.
“There is nothing investors dislike more
than this kind of event,” said Norval Loftus, the head of convertible
bonds and Islamic debt at Matrix Group Ltd. in London, which manages
$2.5 billion of assets including Dubai credits. “The worst-case
scenario will, of course, be involuntary restructuring on the Nakheel
security that brings into question the entire nature of the sovereign
support for various borrowers in the region.”
Dubai
World’s assets range from stakes in Las Vegas casino company MGM Mirage
to London-traded bank Standard Chartered Plc and luxury retailer
Barneys New York through asset-management firm Istithmar PJSC. The
Dubai government’s attempt to reschedule debt triggered declines in
stocks worldwide that had been rebounding from the worst financial
crisis since the Great Depression.
Many
investors didn't foresee the scale of Dubai's debt problems. I spoke to a
consultant today who told me that lawyers and accountants he knew
working in Dubai kept telling him how Dubai's investment authorities
are aggressively financing their purchases of global assets.
So
will Dubai's debt problems plunge global markets to new lows? I
strongly doubt it. Jan Randolph, head of the sovereign risk group at
IHS Global Insight, talked with Bloomberg's Mark Barton about Dubai's proposal to delay debt payments and the role neighboring emirate Abu Dhabi may play in easing the crisis.
Mr.
Randolph thinks Dubai's sovereign risk is overblown and I agree. He
says this is essentially a liquidity problem and the debt represents
20% of GDP. He mentioned that Abu Dhabi which is the real cash cow, can
easily bail out Dubai. Abu Dhabi's sovereign wealth fund is the world's
largest, with over $600 billion in assets. It can easily support
Dubai's debt problems.
What does all this mean for global
investors in the next few days? Nothing much except that you'll have
another opportunity to buy a dip, which is what you'll do if you're
intelligent (that's what Goldman and JP Morgan will be doing). Nothing
has fundamentally changed. The Fed is staying on the sidelines for the
foreseeable future and they'll let this bubble blow. The global
liquidity rally has legs to run, so don't get too flustered by Dubai's
debt woes.
Another interesting trend is what's going on in China. Kevin Hamlin of Bloomberg reports that China Overcapacity Wreaks Global Harm, EU Group Says:
China’s
excess industrial capacity is “wreaking far-reaching damage on the
global economy,” stoking trade tensions and raising the risk of bad
loans, the European Union Chamber of Commerce in China said.
A
4 trillion yuan ($586 billion) stimulus package is worsening
overcapacity, especially in the steel, aluminum, cement, chemical,
refining and wind-power equipment industries, according to a study by the chamber and Roland Berger Strategy Consultants, released in Beijing today.
The
world’s third-biggest economy has rebounded this year on stimulus
spending and a $1.3 trillion credit boom. China is adding capacity when
global demand is yet to recover from the financial crisis, increasing
the risk of trade frictions undermining commerce and making the threat
of non-performing loans within the nation “ever larger,” the EU Chamber
said.
“The Chinese stimulus package has poured credit
into increasingly questionable projects,” the business group said,
without identifying specific ventures. “The global impact already can
be felt in the form of growing trade tensions.”U.S.
President Barack Obama and Chinese President Hu Jintao pledged this
month to work to ease frictions, exacerbated by U.S. duties on Chinese
tires.
The chamber
recommended 30 measures to cut overcapacity, including letting an
undervalued yuan gradually appreciate, reducing a “subsidy” for Chinese
manufacturers.
Energy Prices
It also
proposed lowering energy-price subsidies, raising interest rates to
reduce easy credit, increasing dividend payments by state-owned
enterprises, and spending more on health care and social security to
encourage consumption and cut precautionary savings.No comment was immediately available today from China’s commerce ministry.
In
September, China’s State Council approved plans to curb expansion in
industries including steel, cement, glass, coke, wind turbines and
shipbuilding. The government has also introduced measures to limit land
supply to sectors with excess capacity. So far, the government’s
efforts have been ineffective, the chamber said.
China’s
excess capacity is an “international concern” as goods that can’t be
sold locally may be sent to markets that shrank because of the global
slump, European Union Trade Commissioner Catherine Ashton said in
Beijing Sept. 9. Ashton has since been named the EU’s top diplomat.
‘Unfounded’ Criticism
Yu
Yongding, a former adviser to the Chinese central bank, said yesterday
in Melbourne that that the “worrying” long-term effects of China’s
expansionary policies include overcapacity, bad loans, and inefficient
investment.
Not everyone
agrees with the EU Chamber’s assessment. Isaac Meng, a senior economist
at BNP Paribas SA in Beijing, said industries including steel and
cement are not big exporters and claims of damage to the global economy
are “unfounded.”
“In sectors
where China is a massive exporter, like electronics, there’s no
overcapacity because when exports collapse factories just close,” he
added.
Increasing trade tensions between China and the
U.S. are the result of high unemployment in the U.S., which is creating
“political pressure to reduce China’s exports,” Meng said.
China as ‘Victim’
China’s
own economy is the main “victim” of excess capacity, the chamber said.
Lower profits mean companies lack cash to invest in research and
development and develop more valued-added goods, it said. Businesses
are also forced to cut costs, contributing to slower wage growth and
less consumption, the report added.
“This is a major obstacle on the government’s path to become both an innovative and sustainable economy,” the report said.
China’s
lending surge this year focused mainly on expanding production at
state-owned enterprises, the report said. This led growth in
fixed-asset investment by manufacturing companies to jump to 50 percent
by mid-year from 25 percent in January and February, the chamber said.
Companies
in industries with overcapacity will struggle to repay credit,
increasing the risk of a repeat of the 1990s surge in non-performing
loans, the chamber said.China’s
five largest banks have submitted plans to regulators for raising money
after unprecedented lending eroded their capital, according to four
people with knowledge of the matter.
It’s “particularly
troubling” that more than 140 billion yuan was invested in the steel
industry in the first half of this year and that 58 million tons of
capacity are under construction when global demand may decline 14.9
percent in 2009, the report said. The chamber also warned of “a looming
deluge” of extra cement capacity in the nation.
On
the one hand you have the Fed flushing the financial system with
liquidity and on the other you have massive Chinese stimulus leading to
huge excess capacity in some sectors. Will China export inflation or
will it once again export another wave of goods deflation? It sure
looks like the latter.
Finally all this talk of sovereign
risk, Dubai debt, China overcapacity, and global financial nervousness
is really trivial. For a second year in a row, I watched CNN's Heroes.
If you want to know the real meaning of life, stick your nose out your
Bloomberg screen and read up on these remarkable individuals who through their selfless actions make
a real difference in people's lives.
- advertisements -


It's one thing to argue that Dubai risk is overblown. I disagree -- I think this will affect risk attitudes beyond its absolute size -- but that's a valid argument to make.
It's quite another thing to say this means we should buy into something you *admit* is a bubble. Because "all the cool kids are doing it" (JPM, GS, etc). This kind of reckless advice shows an remarkable mixture of cynicism, naivete, and brazen negligence. And here I thought pensions were supposed to be conservative?
It's another things still to use that CNN "ordinary heroes" article to display your moral superiority to the rest of us. If you're advising people to cynically chase a bubble, Leo, you aren't in a position to talk about the meaning of life. That's called hypocrisy.
Pensions are a big part of the problem. Let me ask you a question. Who do you think is allocating trillions into alternative investments (hedge funds, private equity and real estate)? It's all one big bubble and it will continue to forge ahead because that's what the power elite want. Now, you can all shit down my throat because you don't like the message, but I am sticking to my call and putting my balls on the table. BUY THE DIP - in a week this great "Dubai debacle" will be another fart in the wind.
As for my "moral superiority", which I never claimed to have, I think some events in my life have taught be valuable lessons. Lesson #1: Don't take Wall Street clowns too seriously. Most of them are insecure fools who couldn't hold a candle to real ordinary hard working folks doing extraordinary deeds.
Leo,
I wasn't s---ing down your throat. (Yuck.) Like I said, it's a valid argument to make.
My objection was to the suggestion that folks buy into an admitted bubble. Call me an idealist, but I've always thought investments should be based on valuations, economic fundamentals, et cetera.
I also think it's too blithe to assume that elites will be able to keep the bubble going. Dubai reminds me a lot of the Bear Stearns hedge funds -- the absolute $$$ may not be important, but it has huge symbolic effect on perception. If BS had propped up its funds and made investors whole, the way Abu Dhabi may prop up Dubai debtholders, would that really have forestalled the subprime crisis?
The failure of Bear Stearns had a far more profound impact back then. If you look at counterparty risk, it hasn't exploded up. The CDR Counterparty Risk Index rose to 105.8 basis points, up 4.5 basis points on the week. The CRI measures the average credit spread of the 14 largest credit derivative dealers, all of which traded wider on Friday, according to CDR.
I love the sheer hubris on display here. The Fed is just going to keep on blowing bubbles, so ride it baby! All the intelligent people are doing it! (As if you would know.)
Then, right after cynically telling us to buy the bubble, you scold us for being so absorbed with the market. Unlike the authentic people you heard about on CNN. Or a savvy guy like you, Leo.
Ride it baby, ride it and get a life, you really aren't half as important as you think you are!
People overestimate what central banks can do in a global balance sheet recession, the asset stock is a high multiple of GDP, they can't control asset deflation.
1. In the US the Fed is not facing a closed economy but the most globalized economy since the early 1900s'. All major blocks are in the same situation, unprecedented, and the weakest point is the EU. One major EU bank fails and it would be like 10xLehman. All this is beyond the Fed. In fact the USD-Yuan devaluation against the EUR is increasing the pressure on Europe, wrong spot at the wrong time.
2. US assets are about 13xGDP. Now combine that with the other major blocks and you'll soon realize that there is no entity big enough to stop the avalanche. Case in point is US housing, only one component, in full deflation. It will de down 40-50% by the time it reaches equilibrium. The housing price contraction in other countries will be larger.
http://rutledgecapital.com/2009/05/24/total-assets-of-the-us-economy-188...
http://www.youtube.com/watch?v=BRW1IJ7Un3s
http://1.bp.blogspot.com/_Et4TQ-a0gGU/Sg7WE-vBCII/AAAAAAAACEM/FQKqA_G5XO...
A Sober Reminder On Black Friday
http://market-ticker.denninger.net/
I love the scolding at the end...."You're all worthless sacks of crap who couldn't hold a candle to these do gooders who really know what life is about...you, jerks."
Tell us about life, Leo.
I wasn't scolding any of you but now that you mention it, far too many people in finance overestimate their importance when in reality they are insecure fools who know very little about what really matters in life.-)
"I got nothing to gain by pumping this market. I just call it like I see it."
Perhaps you are trying to pump up your pension plan that you are always belly aching about :}
Two main industries in Greece are tourism and shipping, and they will both benefit going forward as the global economy slowly recovers.----- What recovery... the "jobless recovery"? That's an oxymoron if I've ever heard one.
It plays better in Peoria than "jobless, spendingless downward-trending recovery" though.
Surely the question is the relation of this to other financial arrangements. Aren't these debts pound denominated? Isn't there implied backing by the British government? Maybe don't overemphasize this dustup, but don't isolate it, either. It clearly is not isolated.
The real question is, is this the canary in the mineshaft?
Or, in other words, let's say you're wrong. What is the list of developments which would cause you to say, no, this isn't a pimple, it's a malignant tumor?
I find your take on the market surprisingly naive. The Fed and other central banks don't have the resources to absolutely control the market if Mr. Market decides to sell off. The illusion of control will ultimately be shattered. I'm sure 'they' thought they had everything under control last fall, and we know how that turned out.... Many, many cracks are appearing in the dam.
The only naive people are the ones who think that last year's credit crisis wasn't orchestrated by financial oligarchs to concentrate power in the hands of a few banks. They knew EXACTLY what they were doing.
Leo, that one comment pretty much cleared up my confusion with regard to your comments. It sounds to me like you're the one that cornered the market on tinfoil. With that said, best of luck in the market.
If you go my my blog and read about Operation AIG, you'll see how they threw everything they got to make it look as if the world was coming to an end. Hell, I even got scared back then but now I realize that the banksters manufactured this crisis and profited from it.
The only naive people are the ones who think that last year's credit crisis wasn't orchestrated by financial oligarchs to concentrate power in the hands of a few banks. They knew EXACTLY what they were doing.
Yeah, right. You could see the fear in Hank Paulson's eyes on the news shows a couple of days after the Reserve Primary Fund broke the buck and there was a run on money market funds. The reason they didn't bail out Lehman was that they didn't have the political or legal backing to do so, and didn't yet realize that there would be no consequences if they just broke the law in plain sight.
How do you think a new round of bailouts would play in DC nowadays?
Leo,
What do you think of the Greek situation? Will investment banks & ECB continue financing it in return for a few basis points more (in the case of the former and at flat rates for the sake of euro-stabilty for the latter)?
Short answer is yes. Two main industries in Greece are tourism and shipping, and they will both benefit going forward as the global economy slowly recovers. The ECB will not let Greece go by the wayside but they will chastize them if they don't put their fiscal house in order.
tradertim said:
"just one comment though Leo. imho, i think it's a little condescending to imply that if u don't buy this dip, you're an idiot and that only the "intelligent" ppl are buying it."
Exactly - that was just plain obnoxious by Leo, not to mention ridiculous and credibility-undermining.
I suspect there are plenty of "intelligent" investors who aren't buying anything just about now.
My guess is Leo is long risk and is trying to pump it up.
House prices fell 60% during the past year in Dubai. They are facing a total real estate crash, commercial and residential. Unless Abu Dhabi steps in a buys the bad debt there will be fallout, it's not clear they will, that's what's behind the standstill.
UAE faces up to $184 billion total debt: BofA-Merrill Lynch LONDON (Reuters) -
The United Arab Emirate (UAE) has total debt amounting to $184 billion at the end of 2009, according to estimates by Bank of America-Merrill Lynch, which said the region faces a heavy redemption schedule until 2013. Dubai's shock announcement this week that it is seeking to suspend payments on debt of its state-owned conglomerate Dubai World and property subsidiary Nakheel has roiled global markets, raising fears that the emirate which funded a spectacular building boom on a mountain of debt could default. Of the $184 billion UAE debt, Dubai holds $88 billion while Abu Dhabi accounts for $90 billion. BofA-Merrill Lynch said the debt servicing cost will be higher than these estimates as their numbers only include the principal payments.
http://www.reuters.com/article/ousivMolt/idUSTRE5AQ28C20091127
I suspect this is an issue with the other liabilities within the Dubai sovereign entities. You mention a point about them aggressively financing investments, which I can tell you is a massive understatement. They made some very stupid decisions, and I have no doubt they lost billions doing things they did not understand. By "they", I mean the expats brought in as financial experts, but were unable to correctly price assets or quantify risk.)
I saw this at first hand and it was an accident waiting to happen - so I suspect that when the Abu Dhabi's came in and decided to support the region, they were furious at the foreign banks and the managers employed by Dubai. There may be contracts which would get cancelled in the event of default, which may mean that it would make economic sense for a debt restructuring (creditors would still get 100%), but I do not know.
For me, there is the wider issue of the way the big banks infected the global financial system with toxic crap, motivated purely by profit. The nasty aspect of this was the tendency to embed optionality into structures which clients could not properly model and so did not realize either how much money the banks were making or what the total extent of their risk was. The Chinese government did the smart thing and tore up various oil trades and I would not blame the Abu Dhabi's if they did the same, but this may be the beginning of a wider trend as entities all around the world seek to challenge the enforceability of toxic transactions the banks stuffed them with and the courts start to see the banks in their true light.
I don't consider myself an apocolyptic ZH'er, realist maybe. But seriously, when the logic is "buy because that is what everyone else is doing" I've really got to question whether you are simply a mouthpiece for Wallstreet itself. I don't read many of your articles but are you just attempting to pump this market like every other pimp on Wallstreet talking their book?
reading... why do u have to be a mouthpiece for wallstreet to buy dips? is robert prechter a mouthpiece for all those that 'short' the market on wallstreet? prechter recommended this week being 200% 'short' the market. (ouch!! he better be right). there are 2 things Mark Hulbert pointed out today. 1 is, that prechter is in dead last place among all the timing news letters that Hulbert follows over the long term, and 2, that although u say "buy because that is what everyone else is doing", Hulbert also points out that the Stock Newsletter Sentiment Index is at the same level as it was back in april when the dow was 2400 points lower. doesn't sound like everyone is 'buying' to me. u say you're a realist...well..the reality is, the trend of the market has been and still is up and a 1 or 2% dip because of dubai isn't gonna change that trend today. so u can either buy the dips for now, or take someone's advice that is in last place among all newsletters that hulbert follows...and go 200% short. anyways...as always...good luck trading to everyone.
Well TraderTim,
Exactly who said I was taking Prechter's advice? Or anyone else's for that matter? My point was if Leo was simply going to say you do it cause everyone else is, history hasn't shown that to be particularly effective strategy.
Not to mention there's a whole world between buying the dips and the being 200% short, but hey who's counting, right?
Read my reply to Cindy above. I got nothing to gain by pumping this market. I just call it like I see it.
Hmm, ok. What about the Yen? You really don't see a potential issue here? Not to mention the multitude of issues in the US economy itself?
I'll take you at your word and respectfully disagree. Not sure this will be the only thing that create a change of tide in the market, but I do think it will be a catalyst for a wake up call on the numerous issues within the market. And yes, the Fed may not be going anywhere -- the issue will become what happens when the market realizes they've hit all the buttons, pulled all the levers and *hit is still hitting the fan? Will we continue the "don't worry, be happy mantra?" While I find it perfectly reasonable to play the liquidity rally, you have to know that you can wake up to a morning like today at anytime. Next time might not be controlled.
The Fed, the ECB, the Bank of Japan, China, they all will work hard to avoid a global economic calamity. Don't kid yourself for second. The last thing Chinese officials want is social unrest. And the last thing the global investment banks want is a market crash that will put an end to the big Wall Street profit machine. A little dip here and there is fine, but not an outright catastrophic crash.
Hmmmmm ... if only the market had more of a history of delivering whatever central banks & governments desire.
Geez Leo, good article, honey, but you know the apocolyptic ZHers are going to rip ya a new one.
Why shouldn't we rip him?
Touting bogus numbers like the unemployment figures like they are real
Its like reading one of Jim Cramsters columns from the bubble days about the "baby billion" companies he was always hawking and how "great" their prospects were in spite of having no revenues.
If you want to trade it, trade it, but spare us the bullshit
Waldo
That's what makes a market...let them rip away. The sun will rise tomorrow, the world will continue and ZHers have every right to be skeptical. By the way, I am not a perma-bull, but I just do not see this Dubai debt debacle as the catalyst for a big downturn.
Gee, no ripping. Hmmm. OK, how's this. Leo is obviously as tied to his ideology as most ZHers are, yourself included.
We needed a shake out. I do not see Islamic Nations wanting to lose face any more than China loosing face when it told its citizens to buy gold and silver. Inflation is the quick fix for bad debt so buy on dips.
No big deal. Between Abu Dhabi, Saudi Arabia, China, Norway, etc., there is enough sovereign wealth to mop this mess right up. In a week, this will look like a blip on a chart.
i agree..especially after reading Mark Hulberts article today on Marketwatch.com
just one comment though Leo. imho, i think it's a little condescending to imply that if u don't buy this dip, you're an idiot and that only the "intelligent" ppl are buying it.
Agree
Then again GS and JPM ARE the most intelligent micro percentage gainers x xx% leverage, musical chair , bonus skimming, players out there.
Waldo
I don't mean to be condescending but everyone is so edgy, looking for the sky to crater, that they are totally missing the bigger picture. These "big news items" are just noise so the Wall Street crooks can make more money feeding off the vol. I have seen so many WS shakedowns that I can smell them from a mile away.
Leo is at least partially right on this... Dubai is a sovereign run that is likely to be contained with some effort.
The real issue here are the derviative exposures to this debt... how much leverage is involved, and who are the potential bag holders? Abu Dhabi could come in at any moment and calm the situation, but I haven't heard much as of now.
With volatility on risk assets worldwide being realtively cheap, there's a good reason the market seems 'edgy'. If GS and JPM are making money off the vol, they could make a boatload more if others are triggered.
I'd still keep an eye on CDS in areas like Greece, Ukraine, Japan, and of course Dubai to see if this settles down.
World down 4-8 % last 2 days...US markets down 1.5% w no volatility...Guess it is not such a bid deal....