My sense is that will be but a tempest in a bucket of sand.
Amid concerns that markets in the Gulf will be hammered when they reopen on Monday – and that pressure will mount on banks with exposure to Dubai – investors are looking to Abu Dhabi, the main financial powerhouse in the United Arab Emirates federation, to calm nerves. The crisis has undermined the assumption that Abu Dhabi and the federation would bail out Dubai. So far there has been no statement from the federal government or Abu Dhabi.
Since the economic crisis struck, Abu Dhabi officials have repeatedly talked up the strength of the union and insisted they would not allow another member of the family to fall.
Bankers also say that it would damage Abu Dhabi if Dubai – just a 1½ hour drive from the capital – imploded, particularly given the exposure of Abu Dhabi entities, investors and banks to Dubai. Abu Dhabi officials have previously said support for Dubai would be forthcoming if needed.
But there is risk
Perhaps Dubai’s financial problems are much bigger than have been assumed so far. Perhaps Dubai’s debt includes sizeable off-balance sheet liabilities that imply a total debt burden well above the US$80-90bn in debt that the markets have estimated so far. This could imply that the debt issued by Dubai in recent weeks (see above) is indeed insufficient so meet upcoming redemptions. The government may have concluded that increasing delinquencies and defaults would pose an ongoing threat to many banking and property companies and that just addressing near term balance sheet debt would mean tackling just the tip of the iceberg. The repercussions of this scenario may reverberate beyond Dubai and into other Gulf regions.(UBS)
At the other end of the spectrum, one cannot rule out—as a tail risk—a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s. We think this would clearly be a very serious outcome—which again remains only a tail risk at this stage—but the implications would be indeed quite severe in our view. These would include a sudden stop of capital flows into EM, more fragility for foreign banks exposed to the Middle East, possible contagion into global developed markets, and eventually a major step back in the path to recovery out of the global financial crisis.(BoA Merrill Lynch)
Dubai’s troubles resonate far beyond the desert fantasyland that its borrowing created, fueling concerns that financially stretched nations like Greece and Hungary may struggle to pay off debts.
Here’s a nifty breakdown of global banks’ exposures to the United Arab Emirates, via Reuters on Friday.
According to the Bank for International Settlements, banks have claims totalling $123bn on debtors in the UAE, $88bn of which are held by European banks and $50bn by UK banks alone.
UPDATE: The eagle-eyed head of web communications at the BIS points out Taipei, with $1.63bn in exposure, ought to have made it into Reuters’ list.
From articles in WSJ, FT and FT Alphaville
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