On Dubai

Because episodic risk never takes a holiday (Can’t I just trip Black Friday shoppers at the mall in peace?), this is a look at Dubai and the ramifications of a credit event.

From The Courier-Mail:

DUBAI is now the epicentre of what could be the second wave of the global financial crisis. The tiny Arab state this week revealed it was about to default on interest payments due on $US60 billion ($65 billion) worth of debt owed by a state-owned corporation.

Nice way to start it off.  Debt-to-GDP at 125%.  Fantastic.  The emirate has about $5bn in debt to roll by Dec. 14 with another $5bn due in 1Q’10.

And when you see stories like this in The Telegraph, it doesn’t give you a good feeling.  The QE2 may be getting sold to lower the debt load:

The team of auditors brought in by the government, led by one of Britain’s leading experts in restructuring troubled firms, is to trawl through all the company assets with no options ruled out, a spokesman confirmed on Friday.

The Daily Telegraph also understands that Abu Dhabi is giving close scrutiny to ‘non-core’ assets like the QE2 in the Dubai World portfolio.

The debate has been raging today about whether or not this is something isolated or something that can morph into something bigger.  The CDS market doesn’t seem to be taking any chances, with spreads moving wider on the news.

But here’s something else to consider.  Dubai World has major commercial real estate & retail holdings, either as part-owner or as a guarantor through their subsidiary Nakheel.  Again, from The Telegraph:

Nakheel has two hotel chains, one of which owns the Turnberry Hotel. Istithmar World, Dubai World’s venture capital arm, has stakes in Barneys, the New York department store, Cirque du Soleil, the South African entrepreneur Sol Kerzner’s hotel chain, and Standard Chartered Bank.

The company has also bought into MGM Mirage, the Las Vegas gambling operation – even though gambling is banned in Dubai – and Troon Golf. London properties include Adelphi on the Strand and the Grand Buildings in Trafalgar Square.

No matter how you slice this up, that adds up to a lot of illiquid holdings.  Some of it may need to be sold off to reduce their debt load.  But who is in a position to buy golf courses, Vegas gaming resorts, and posh commercial real estate?  And at what price?  Some defaulted casino developments I’ve heard about will suffer losses approaching 90 cents on the dollar.  Imagine the same LGD (loss given default) applied to these “high-end” holdings and it doesn’t take long to figure out how messy this can get.

As The Courier-Mail astutely pointed out:

The bottom line is the world as a whole still has a very long and painful deleveraging process to endure, which is likely to see economic growth constrained for some years.

The Bible talks about elephants passing through the eye of a needle in the context of getting into Heaven.  Unfortunately, there’s no miracle to be had here, but the illustration is very appropriate.

The only way out is to let the bloodletting commence.  In earnest.

 

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Filed under finance, macro, Markets, Way Forward

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