ST : Dubai's debt crisis sparks global sell-off

Nov 28, 2009
Dubai's debt crisis sparks global sell-off
Bank shares savaged as default triggers fears of new financial meltdown
By Fiona Chan

STOCK markets around the world reeled yesterday as investors panicked that the Dubai government's debt crisis would trigger a fresh financial meltdown.

The spectre of a Gulf emirate plunging into bankruptcy drove investors from Tokyo to London to seek safety in the US dollar and bonds, while dumping riskier assets such as commodities and stocks.

In particular, shares of banks in Asia and Europe were savaged - with HSBC Holdings and Standard Chartered Bank faring the worst in Hong Kong, and ING Group and Royal Bank of Scotland among the biggest losers in Europe. All four have been involved in Dubai World deals.

Dubai's government investment firm Dubai World shocked markets on Thursday when it asked for a six-month delay in repaying a US$59 billion (S$81 billion) tranche of its total debt of US$80 billion.

The news, which credit rating agency Standard & Poor's said amounted to a default, recalled Argentina's sovereign default in 2001, the biggest in history.

The announcement came just hours before the Middle East shut down for a religious holiday. A lack of new information worsened the panic, reports said.

Asian markets took the news harder than European ones yesterday, with reports of Tokyo traders describing the panic as 'Financial Crisis Part II'.

The Hang Seng Index in Hong Kong plunged 4.8 per cent yesterday, while Japan's Nikkei 225 Stock Average slumped 3.2 per cent to a four-month low. South Korean shares also closed at a four-month low after falling 4.7 per cent.

In Europe, major markets lost just over 3 per cent in Thursday's trading. The FTSE 100 index in London closed down 3.2 per cent - its worst one-day fall since March - while Germany's DAX fell 3.2 per cent and France's CAC-40 dropped 3.4 per cent. The European markets were down fractionally yesterday after the mid-morning session.

The Dubai news caused panic throughout trading in London, Mr David Jones, chief market strategist at IG Index in London, told The Independent newspaper.

'The market had been chugging along nicely for the past six months, now this. A lot of people are worried that it is a precursor for more bad news,' he said.

The Singapore stock exchange was closed yesterday for the Hari Raya Haji holiday, delaying any carnage to when it re-opens on Monday.

Markets in the United States were also closed on Thursday for the Thanksgiving holiday, but the Dow was down about 200 points as soon as markets opened for trading last night.

Dubai, touted as an economic miracle of the Middle East, poured billions of dollars in borrowed money into building huge luxury developments and lavish tourist attractions. Now, investors are worried about the health of banks that lent money to the debt-ridden emirate.

HSBC's Middle East arm was by far the biggest single foreign lender in the United Arab Emirates (UAE), with outstanding loans of US$17 billion as at the end of last year, according to an Agence France-Presse report. It is not clear how much of this was lent to Dubai.

Stanchart was next with US$7.8 billion owed as at end-2008, and Barclays Bank was third with US$3.6 billion, said AFP.

Citigroup analysts said Japan's largest banks, Mitsubishi UFJ Financial and Sumitomo Mitsui, had also lent hundreds of millions of dollars to Dubai World.

In Singapore, DBS Bank was mentioned by CLSA analyst Daniel Tabbush as having exposure to Dubai. All three local banks - DBS, UOB and OCBC - have also lent money to Singapore's South Beach development, a joint project involving City Developments and Dubai World.

But some commentators yesterday cautioned that the selling was overdone.

'Everyone has gone into panic mode, but this is Dubai. It is not going to send the world into a tailspin,' Mr Chris Blair, Patersons senior client adviser, said in a Dow Jones report.

All eyes are now on whether Dubai's richer cousin Abu Dhabi, the capital of the UAE's seven emirates, will lend a hand. It will not be the first time Abu Dhabi has had to help. It bought US$10 billion in bonds from Dubai in February to ease a cash crunch.