Asian Markets Tumble as Dubai risks Default

Will Sovereign Debt defaults be the catalyst for the next leg of the financial crises? The Hong Kong Hang Seng index plunged 4.84% last night and the Japanese Topix fell 2.24% as Dubai proposed delaying sovereign debt repayments. Credit Default Swaps, derivative instruments that allow lenders to hedge against the risk of counter-party default surged for emerging markets yesterday. Indicating that the market fears that further defaults are likely in the developing world. Bloomberg quote Nick Chamie, head of emerging-market research at Toronto-based RBC Capital Markets

“Dubai is the most indicative of the huge global liquidity boom and now in the aftermath there will be further defaults to come in emerging markets and globally,”

And Mark Mobius of Templeton Asset Management Ltd, with €25bn invested in emerging markets

“If Dubai has to default, that could start a wave of defaults in other areas.”

The problems in Dubai appear to be caused by funding issues with the flagship Dubai World development. The Telegraph reports that markets may have previously assumed that a bail-out was already in place behind the scenes (likely funded by Abu Dhabi). The government statement on Wednesday put that assumption in doubt. Efforts today to reassure markets may be bearing some fruit with European stock markets only trading down slightly today, after significant falls yesterday. The FTSE had suffered it’s biggest one day fall since March.

Adds: Also worth a read The dark side of Dubai by Johan Hari

Meanwhile, stateside, respected bank analyst Meredith Whitney preditcts a double dip recession and urges investors ‘to get out’, if there is a consolition she feels in a double-dip recession the second leg down on the W will be less severe than the first.

  • Scaramoosh

    There is good trading to be done in the GBP/$ market at the moment, as those that buy into the doom and gloom, and the notion that Uk banks have big exposure to Dubai debt trade against those (like JP Morgan – see below link) – who think that it is all overdone. Each time the pound rallies against the dollar, the big hitters come in and sell it off;

    P.S Hennessy Gold Cup – Take the 28s Nenuphar Collonges (Betfair) with a view to trading out before the race!

  • Mack

    This one is also worth a read, but less rosy than the alleyinsider (businessinsider boo!) article

  • Different Drummer

    Dubai: Capitalist Valhalla

    So what happens to free market warriors who now become (ex) heads of zombie banks – that is a bank that has no money and lends no money but survives by feeding on our taxes, jobs, savings and pensions? Why they like the rest of the walking finance capitals’ undead go to capitalist Valhalla: (German Norse: The house of the Gods and dead warriors) – better known as Dubai.

    How on earth did those who bought stock in this particular property bubble expect to be told the truth by the tiny group of medieval autocrats who run Dubai and the Emirates region?

    Fantasy Finance

    Last Wednesday some of the mist began to lift. Sheikh Ahmed bin Saeed Al Maktoum, the chairman of Dubai’s Supreme Fiscal Committee announced that they will not be paying their debt to western banks as they needed one month to get the money to meet the payment – that’s a hell of a long time in today’s banking world. Time enough to put fear and uncertainty back into the minds of the dealers in ‘the green shoots of recovery’ on the floors of the world’s stock exchanges.

  • Different Drummer

    The Implications of The Dubai Default

    From The New York Times Today:

    On Dec. 14, $3.52 billion in Nakheel bonds come due. One of the largest Islamic group of bonds issued, the deal was snapped up by Western and regional investors. In a reflection of how sure investors were that Dubai would meet these payments, the bonds were trading at a 10 percent premium to face value earlier this week. They are now trading at around half of face value.