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May 25, 2012
Stockholm falls as Dubai shocks global markets
Published: 27 Nov 09 08:34 CET | Double click on a word to get a translation
Online: http://www.thelocal.se/23512/20091127/
The Stockholm stock exchange fell by 3.1 percent on Thursday in response to an announcement that Dubai World has requested deferment on its $59 billion mountain of debt.
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Insurance premiums on Dubai-related debt spiralled on Thursday in response to the announcement that the emirate's holding company, behind much of the spectacular property boom in the territory in recent years, was having trouble meeting debt payments.
Insurance on a five-year $10 million loan to Dubai is now running at over $500,000 per annum, Reuters reports.
While Swedish banks are not overly exposed to Dubai and Middle Eastern markets the emirate's financial tentacles extend to the Stockholm exchange.
Dubai's holding firm Borse Dubai owns for example a fifth of Nasdaq OMX, the firm which operates the Stockholm exchange.
"This is nothing that affects either Nasdaq OMX or the Stockholm exchange," said Carl Norell, a spokesperson for the exchange, to news agency TT.
Asian markets also felt the financial chill from Dubai overnight with the Nikkei 225 down 3.2 percent, the China Shanghai Composite down 2.2 percent and the Hong Kong Hang Seng dropping 4.3 percent.
With the US exchanges closed for the Thanksgiving Day holiday it was difficult to gauge Wall Street's reaction to the news.
Dubai World has asked its creditors for respite until May 30th 2010 in order to restructure its balance sheet.
An eventual bankruptcy would have extensive consequences, the UK Financial Times warned on Thursday. The total debts accumulated by Dubai are thought to exceed $80 billion.
The head of Sweden's Riksbanken, Stefan Ingves, said on Thursday that it is too early to judge the situation.
"Swedish banks are not that big in that part of the world, so it will hardly be a great concern for Swedish banks," he said.
TT/Peter Vinthagen Simpson
news@thelocal.se
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It does not matter how small market exposure is for local banks. The knock on effect could be devastating.
This will definately take down some major banks in the UK and USA, not the small fish who have completely collapsed so far.
In Ireland there is also significant exposure, but then again the Irish economy can not get much worse anyway.
If Dubai falls, it could hit Quatar, Saudi Arabia and Kuwait. In turn they would pull more money out of the USA and pension funds in Europe to sort out there mess. That could drag us all down.
They will probably raise the price of oil to pay for the mess they have got themselves into wiht the profits from selling us oil.
This could create a ripple effect all around. Let us see what's coming.
"Not the small fish who have collapsed so far"
You mean the small fish like Citigroup, RBS, Fortis, Halifax, Lloyds, ING, Bank of America, Wachovia, plus hundreds more, who without tax payer support in the trillions would now be out of business.
Plus the investment banks of Goldman Sachs, Lehmans, Bear Stearns etc who have had to turn themselves into bank holding companies to get the same taxpayer support.
You mean those small fish?
The neighbor emirate, Abu Dhabi, still has an oil surplus sufficient to cover the whole debt.
Yes. Most of those banks have been government bailed out. If Dubai goes down, most likely they will completely collapse.
Most of those banks and others have given loan guarentees in Dubai to various corporations for numerous construction and financial projects.
If Dubai goes down, most likely Lloyds will go down first as they have underwritten most of Dubai, unless lloyds is literally nationlised the instant it happens. If they save lloyds they will stop a catastrophic collapse. That will be the only plan of action.
In the USA about 2 to 3 small banks collapse per day at present. If Dubai goes doen, the larger banks will also go down at a faster rate.
This has the potential to destroy a large section of our pension investment schemes in Europe and the USA. That will hit everyone very hard if it happens.
This is a very real issue.
Not exactly a vacation spot.
As for the "potential default" in Dubai. I would speculate that either the markets will be forgiving and allow them to restructure or the Government will step in and help Dubai World. Probably no need for Abu Dhabi to help. Who this could really hurt, besides UK, are the emerging and developing markets as investors seeking higher yields then they can get from US Treasuries, pull their money out of those markets. This is also dangerous because it could create a crisis of liquidity (an emerging market bubble) that could bring the world into a double dip recession...but I think that will happen anyway after dismal 4th quarter for retail, stimulus packages dry up and commercial real estate hits the proverbial fan.
This will affect the USA more than any other country as it has the most exposure in that market.
The simple reason is this. The Saudi's, Dubai's and everyone else in the middle east has been using US funds to invest oil profits. If Dubai defaults, which there is a high chance they will strip out there US investments to pay any default.
Lloyds and HSBC are underwritten in the USA.
If you think JP MOrgan would survive a Dubai default you are mistaken. If ever in Dubai you will find that JP Morgan has a lot of exposure there, as has a lot of other US banks.
Also US banks are far from well capitalised. They may be well capitalised in US thinking, but in Europe they would be technically bankrupt.
If the American banks lose money on this, quite a few will have to be bailed out again, with some going under.
Also if Dubai defaults, bank and insurance underwriters will be hit very hard, with several going under, which would distort the banking market for years.
AIB in Ireland also has exposure in Dubai as has Royal Bank of Scotland in the UK and Swedbank in Sweden.
A lot of Italian banks have exposure there as well, but they are basket case banks anyway and most of them would deserve to be bankrupted.
The USA, UK and other countries should not have bailed oput the banks. They should have crashed a few so as to drive home the message that they can fail as well. Now with bailouts they believe they will always be saved, mo matter what they do.
The concern lies with emerging and developing markets like India and the Philippines. You see investors with their pile of money have been seeking Government bonds alternative to the US Treasuries. This is because those bonds are yielding 3-4% vs. the next to nothing they'd be getting on Treasuries. If things are unstable and they pull their money out, that is a problem for them. The USD, Euro, Yen, etc...could see a nice uptick as investors seek safety.
You speak of the US being the most affected, while from what I have read in the Financial Times and Bloomberg, it is the UK who seems most concerned at the moment. Maybe when you say the US has much to lose you refer to dollar amounts, which marked to our GDP is next to nothing.
The big banks like JPM, BAC, WFC are sitting on more cash then they generally ever do. And they are not loaning it out. They are capitalized and as far as they're concerned, they don't need to lend it out. Now there have been a few hundred banks in the past 24 months to have failed in the US and as far as teaching a lesson. Well, after Lehman Brothers almost put the world in a depression, I don't think governments are too concerned about punishment as they are with saving peoples lives (in the form of homes, retirement, and jobs). Legislation should provide some punishment (i kid), but it'll appease the laymen.
Alas, I do not think Dubai World will default. They will restructure their debt, or be bailed out by Abu Dhabi, etc...
There is no dividing line between Dubai World and the state of Dubai. In Dubai they are treated as the same thing, by the government, banks and business's.