LONDON (AP) -- World stock markets fell sharply Thursday as investors fretted over the debt problems at Dubai World, a government investment company, and the continued fall in the dollar.
AP - A Tokyo money dealer looks at a memo as the U.S. dollar is traded at 86.64 yen on ...
Markets are usually relatively quiet when Wall Street is closed for a holiday, as it is Thursday for Thanksgiving Day -- not so today.
In Europe, the FTSE 100 index of leading British shares was down 99.84 points, or 1.9 percent, at 5,264.97, although trading has been halted for over an hour because of technical problems. Germany's DAX fell 115.17 points, or 2 percent, to 5,687.85 while the CAC-40 in France was 84.92 points, or 2.2 percent, lower at 3,724.24.
Earlier in Asia, the Shanghai index tanked 119.19 points, or 3.6 percent, to close at 3,170.98, its biggest one-day fall since August 31, while Hong Kong's Hang Seng shed 1.8 percent to 22,210.41.
Sentiment in stocks has been dented by the news that Dubai World, which is thought to have debts totaling around $60 billion, has asked creditors if it can postpone its forthcoming payments until May. That has stoked fears of a potential default and contagion around the global financial system, particularly in emerging markets.
"Certainly the Dubai debt debacle and the uncertainty that it has created has had a severe knock on effect," said David Buik, markets analyst at BGC Partners.
Investors were also keeping a close eye on developments in the currency markets as the dollar slid to a new 14-year low of 86.27 yen, while the euro pushed up to a fresh 15-month high of $1.5141. By late-morning London time, the dollar had recouped some ground and was trading at 86.75 yen, down 0.7 percent on the day, while the euro was 0.3 percent lower at $1.5094.
The continued appreciation in the value of the yen continues to dent Japanese stocks as investors worry that the rising currency will have a detrimental effect on the country's exports. Japan's Nikkei 225 stock average fell 58.40 points, or 0.6 percent, to 9,383.24.
Kit Juckes, chief economist at ECU Group, said the developments in Dubai and in the currency markets are related as the fall in risk appetite has pushed money into government bonds and into safe haven currencies such as the Swiss franc and the yen.
This, he said, is "testing the tolerance of central banks to see their currencies cause further damage to their economies."
Already there has been unconfirmed talk in the markets that the Swiss National Bank has intervened to buy dollars to prevent the export-sapping appreciation of the Swiss franc.
Meanwhile, Japanese Finance Minister Hirohisa Fujii tried to assure the market he was closely monitoring the situation and would "take appropriate steps if foreign exchange rates move abnormally." But that did little to ease investor worries.
Across all markets, there is a growing awareness that investors may use the upcoming year-end to lock-in whatever profits have been made over the last 12 months.
Gold, one of the biggest high-flyers over the last few months, continued to rise as it garnered renewed support from its safe haven status. It hit a new record high of $1,196.8 an ounce, before falling back modestly. By late-morning London time, gold was down 0.3 percent at $1,183.90 an ounce.
Oil also fell alongside stocks -- the two have traded alongside each other for much of this year. Benchmark crude for January delivery was down 84 cents at $77.12 a barrel. On Wednesday, it rose $1.94.
Elsewhere in Asia, markets in Australia, Singapore, Taiwan and Indonesia closed lower.
AP Business Writer Writer Jeremiah Marquez contributed to this report from Hong Kong.
Dubai's financial health has come under scrutiny after a major, government-owned investment company asked for a six-month delay on repaying its debts.
Dubai World, which has total debts of $59bn (£35bn), is asking creditors if it can postpone its forthcoming payments until May next year.
Dubai World has also appointed global accountancy group Deloitte to help with its financial restructuring.
The company has been hit hard by the global credit crunch and recession.
It was due to repay $3.5bn of its debts next month.
The request for a delay in repayments led to major credit ratings agencies downgrading a number of state-backed companies.
Following six years of rapid growth, the Dubai economy has slumped since the second half of 2008.
ANALYSIS
Ben Thompson, business reporter, Dubai
Financial markets and businesses are closed here for the Eid holiday - some suggest that's why the announcement was made when it was.
It's sparked real shock that things have come to this. Just 12 months ago, few could have believed the city would find itself asking for this lifeline. It seems Dubai is now paying the price for living on borrowed money.
Of course, everyone knew the boom couldn't last forever, but no-one expected it to collapse when, or as suddenly, as it did. Property prices have more than halved over the past year and investors have fled.
The official figure for Dubai's debt is $80bn, but talk to anyone here and the feeling is the figure is much higher. Unpaid bills, abandoned cars and empty buildings are all too obvious. Some analysts put the real figure at close to $160bn.
This has led to Dubai property prices falling sharply.
'Shocking'
The Dubai government said in a statement that the request to delay debt repayments also applied to property developer Nakheel, a Dubai World subsidiary.
"It's shocking because for the past few months the news coming out has given investors comfort that Dubai would most probably be able to meet its debt obligations," said analyst Shakeel Sarwar, of SICO Investment Bank.
Dubai is one of the seven self-governing emirates or states that make up the United Arab Emirates.
Analysts say the Dubai government has paid the price for a flamboyant economic model centred on foreign capital and giant construction projects.
Questions are now being raised about Dubai's ability to repay its debts, said the BBC's Middle East correspondent Jeremy Howell.
Some have speculated it is likely to turn to the more economically conservative Abu Dhabi emirate to bail it out.
Global credit rating agency Standard & Poor's, which rules on a company's or government's ability to repay its debts, said the announcement "may be considered a [debt] default".
Our correspondent said: "Standard & Poor's and Moodys immediately downgraded all six state-backed corporations in Dubai, downgrading some to junk status."
Junk is the term commonly used to describe bonds that are rated below investment grade by ratings agencies.
The Dubai World announcement was made on the eve of the Eid al-Adha Muslim festival, which will see many government agencies and companies close in Dubai until 6 December.
Dubai Debt Delay Rattles Confidence in Gulf Borrowers (Update2)
Nov. 26 (Bloomberg) -- Dubai is shaking 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. Bonds of its property unit, Nakheel PJSC, mature Dec. 14. Dubai contracts climbed 124 basis points to 564, the most since they began trading in January, adding to 122 yesterday, 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.
Moodys Investors Service and Standard & Poors cut the ratings on state companies yesterday, saying they may consider state-controlled Dubai Worlds plan to delay debt payments a default. The sheikhdom, ruled by Sheikh Mohammed Bin Rashid Al Maktoum, borrowed $80 billion in a four-year construction boom that reduced its reliance on falling oil supplies and created the regions tourism and financial hub.
Further Defaults
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, said Nick Chamie, head of emerging-market research at Toronto-based RBC Capital Markets.
Stocks, bonds and currencies fell across developing countries. The MSCI Emerging Markets Index of stocks dropped 1.1 percent, led by declines in China and Russia. South Africas rand weakened 1.3 percent against the dollar and the Turkish lira slumped 1.1 percent. Hungarys forint lost 1.2 percent per euro. Credit-default swaps on Russia increased to 206.5 basis points from 192.
Gulf region default swaps jumped, with contracts linked to Bahrain rising 32.5 basis points today to 227, the biggest increase since Feb. 18. Contracts linked to Abu Dhabi added the most since February yesterday, climbing 36 basis points to 136.5 and were another 27 basis point higher at 164 at 10:10 a.m. in London, according to London-based CMA. Qatar default swaps advanced 23 basis points to 115, adding to yesterdays 11 basis- point increase.
Saudi Debts
Saudi Arabia contracts climbed the most since February, adding 20 basis points to 110.3. The British Bankers Association asked the U.K. government to intervene with Saudi authorities over debts of at least $20 billion owed to as many as 100 banks by Saad Group and Ahmad Hamad Algosaibi & Brothers Co., two family holding companies based in the oil city of Al- Khobar, according to a letter dated Nov. 20.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point is 0.01 percentage point and is equivalent to $1,000 a year on a contract protecting $10 million of debt.
Dubais contracts, which increase as perceptions of credit quality deteriorate, are the fifth most expensive worldwide, exceeding Icelands and Latvias.
Argentina Default
Default swaps on Dubai World unit DP World Ltd., the Middle Easts biggest port operator, jumped by a record 181 basis points to 540.5 yesterday and were priced at 539.5 today, according to CMA data. DP World and its debt are not included in the restructuring process for Dubai World, the government said in a statement to Nasdaq Dubai today.
The price of Nakheels bonds fell to 74 cents on the dollar from 85 yesterday and 107 a week ago, according to Goldman Sachs Group Inc. prices on Bloomberg.
UBS AG, Switzerlands largest bank, said it expects the U.A.E. will prevent a default by Nakheel. Dubai is one of seven sheikhdoms in the U.A.E. that includes Abu Dhabi, which holds 8 percent of the worlds oil reserves and bought $5 billion of bonds sold by Dubai yesterday through state-controlled banks.
Unlike Argentina, which stopped payments on $95 billion of debt eight years ago after yields on benchmark bonds more than doubled in four months to more than 40 percent, Dubais announcement yesterday was a surprise, said Alia Moubayed, a London-based economist at Barclays Plc.
Standstill Agreement
The government raised $1.93 billion last month in its first sale of Islamic bonds, attracting more than $6.3 billion of orders. The dollar-denominated securities due 2014, which are governed by Shariah laws barring investors from profiting from the exchange of money, dropped to 8.1 percent today to 89.5 cents, lifting the yield to 9.1 percent from 6.2 percent on Nov. 24, according to ING Groep NV prices on Bloomberg.
The uncertainty and unpredictability around upcoming debt repayments implied by yesterdays announcement will add to pressure on Dubai spreads, which may lead to a re-pricing of Dubai and U.A.E. risk, Moubayed wrote in a report yesterday.
Dubai World will ask creditors for a standstill agreement as it negotiates to extend maturities, including $3.52 billion of Islamic bonds due Dec. 14 from Nakheel, Dubais Department of Finance said in an e-mailed statement yesterday.
Sheikh Mohammed removed the chairman of Dubai World from the board of Dubais main holding company, the Investment Corporation of Dubai, last week. Dubai World had $59.3 billion in liabilities and $99.6 billion in total assets at the end of 2008, subsidiary Nakheel Development Ltd. said in an August statement. Dubai owes $4.3 billion next month and $4.9 billion in the first quarter of 2010 through government and corporate debt, Deutsche Bank AG data show.
Brink of Failure
Nakheel is now standing on the brink of failure given the astonishing amount of cash Dubai would have to inject on it in order to see the enterprise survive, said Luis Costa, emerging-market debt strategist at Commerzbank AG in London. Events like this are a perfect storm.
Dubai Worlds more than 70 creditors face the prospect of writedowns on as much as $60 billion of debt if they havent unloaded their holdings and the state-owned company fails to win additional support from Abu Dhabi.
The biggest creditors are Abu Dhabi Commercial Bank and Emirate NBD PJSC. Other lenders include Credit Suisse Group AG, HSBC Holdings Plc, Barclays, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, according to a person familiar with the situation.
Our exposure is immaterial, said Credit Suisse spokesman Marc Dosch. HSBC and Lloyds declined to comment when contacted by Bloomberg. Spokesmen at RBS and Barclays were not immediately available to comment.
Rating Downgrades
Emaar Properties PJSC, U.A.E.s biggest developer, was cut by four levels to Ba2, two steps below investment grade, by Moodys. Jebel Ali Free Zone, an operator of business parks, and DIFC Investments were also lowered to speculative-grade by Moodys yesterday. DP World and Dubai Electricity & Water Authority were downgraded two levels to Baa2, the second rank above junk. Moodys and S&P said they may cut ratings further.
The debt restructuring may be considered a default under our default criteria, S&P said in a statement.
Borrowing from Abu Dhabi state banks accounted for half the $10 billion Dubai ruler Sheikh Mohammed said he planned to raise by yearend. He said Nov. 9 the program will be well received, and those who doubt the unity of Dubai and Abu Dhabi should shut up.
Sheikh Mohammed turned to Abu Dhabis central bank on Feb. 23 to raise $10 billion by selling debt. The emirates credit default swaps dropped 178 basis points that day, after trading for a record 976 basis points.
Its very important to resolve this in a way that will minimize contagion across the region, Matrix Groups Loftus said.
To contact the reporter on this story: Arif Sharif in Dubai at [email protected]
Dubai World and properties built on sand
David Wighton: Business Editors commentary
The worlds tallest building will open in Dubai in just five weeks time and visitors to its observation deck on the 124th floor will be able to look down on the half-finished buildings and empty construction sites that now litter the Gulf emirate.
Dubais once-booming economy has deflated and its property sector, with its ludicrous architecture and record-breaking buildings, has collapsed. An estimated 400 projects worth more than $300 billion (£180 billion) have been cancelled, shut down or are on a go-slow as developers try to cope with property prices that are down as much as 60 per cent.
Long-term residents and even the Government of Dubai have often seemed to be in denial about the seriousness of the situation but it was rammed home yesterday when Dubai World, the state-owned conglomerate, said that it was seeking a six-month standstill on its debts.
The group includes Nakheel, the property developer responsible for the huge Palm Jumeirah and The World developments built on reclaimed land off the coast. Dubai Worlds $60 billion of liabilities represents nearly three quarters of the emirates total state debt and the possibility that the company might be struggling to meet its obligations shocked credit markets.
Credit default swaps, the cost of insuring against a debt default by Dubai, leapt by a quarter, or 100 basis points, yesterday.
The Government made the announcement that it would restructure Dubai World in a brief statement before everyone left for a three-day holiday, leaving a trail of stunned investors and creditors in their wake.
Just what will happen to Dubai World (and the state of Dubai) is unclear. If there is a fire sale of assets there will be plenty to choose from. Dubai World owns P&O ports, which it acquired three years ago for £3.9 billion, as well as investments with Las Vegass MGM Mirage casino group and a $1 billion stake in Barneys, the New York department store.
With appetite for acquisitions returning, a Dubai World fire sale could raise the unusual prospect of Western investors bailing out Arabs.
"The enemy is a very good teacher" Dalai Lama
"Confidence doesn't come from being right all the time; it comes
from surviving the many occasions of being wrong." B.N. Steenbarger
"Luck is where preparation meets opportunity"
Dubai became the Gulf's biggest credit crunch victim a year ago. But its ruler, Sheik Mohammed bin Rashid Al-Maktoum, had continually dismissed concerns over the city-state's liquidity and claims it overreached during the good times.
When asked about the debt, he confidently assured reporters in a rare meeting two months ago that "we are all right" and "we are not worried," leaving details of a recovery plan - if such a plan exists - to everyone's guess.
Then, earlier this month, he told Dubai's critics to "shut up."
After months of denial that the economic downturn even touched it, the Dubai government earlier this year showed signs of trying to deal with the financial fallout that has halted dozens of projects and prompted an exodus of expatriate workers.
Last week, Sheik Mohammed demoted several prominent members of Dubai's corporate elite and replaced them with members of the ruling family, including his two sons, one of whom is his designated heir.
Businessmen who fell out of favour were closely associated with Dubai's phenomenal success. They include the head of Dubai World, Sultan Ahmed bin Sulayem, and Mohammed Alabbar, the chief of Emaar Properties, developer of the Burj Dubai and hundreds of other projects.
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