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Hoardings alongside Nakheel's Waterfront construction site at Jebel Ali in Dubai - Source: Reuters -
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Investors recoiled from risky assets and dumped shares in Asian
banks and builders, fearing a Dubai debt default could reignite the
financial turmoil of the credit crisis.
Stocks from Tokyo to Mumbai were haunted by suspicion of lenders'
exposure to Dubai firms that built islands in the Gulf, planned
cities from Pakistan to Africa and fashioned the financial hub of
the world's biggest oil exporting region.
"This an important reminder that the credit crisis is forgotten but
not gone," Robert Rennie, strategist at Westpac Global Markets
Group, said in a note.
Asian banks, like their European peers, scrambled to distance
themselves from Dubai, a desert emirate that emerged from dusty
obscurity to invest in global lenders such as Standard Chartered
and lure fund managers with the promise of a tax-free
lifestyle.
Dubai, part of the oil-exporting United Arab Emirates, said it
would ask creditors of state-owned Dubai World and Nakheel to agree
to a standstill on billions of dollars of debt as a first step
towards restructuring.
Dubai World, the conglomerate that led the emirate's expansion, had
$83 billion of liabilities as of August, most of Dubai's total debt
of $113 billion.
Nakheel was the builder of three palm-shaped islands off
Dubai.
The news shook markets recovering from the collapse of the US
housing bubble and contagion that threatened to rupture the global
financial system last year.
"The panic button's been hit again," said Francis Lun, general
manager of Fulbright Securities in Hong Kong.
Analysts expect financial support from Abu Dhabi, the UAE's largest
emirates and producer of most of its oil.
But Dubai may have to abandon an economic model that focused on
developing swathes of desert with foreign money and labour.
The prospect of a bailout did little to allay concerns among
investors, already worried the global economy may not be recovering
quickly enough to justify a near doubling of prices for emerging
market stocks and many commodities since March.
"The biggest worry I have is whether this will trigger a repricing
in the overall emerging market," said Arthur Lau, a fund manager in
Hong Kong with JF Asset Management.
The nerves showed in credit markets, at the centre of the financial
storm triggered by the Lehman Brothers' bankruptcy last year.
Asian credit default swaps, used to insure against default, were at
their widest in a month, with the Asia ex-Japan iTraxx
investment-grade index touching 124/129 basis points.
Dubai's credit default swaps were being quoted as high as 500-550
basis points, some traders said on Thursday.
Banks
Dubai's debt problems are a hangover from a property bubble that
imploded after the financial crisis derailed its plans to become a
magnet for tourists and a regional hub for everything from shipping
to entertainment.
Banks' exposure to a Dubai default pales in comparison to the $3.9
trillion in write-downs the International Monetary Fund estimates
US and European lenders will have to make between 2007 and 2010 as
a result of the credit crisis.
International banks' exposure to Dubai World could be as high as
$16 billion, banking sources told Thomson Reuters LPC.
It was the fear of the unknown that was driving trade.
"Similar stories to the one in Dubai are likely to come out,
leading risk money to pull out from assets such as commodities and
stocks," said Takahiko Murai, general manager of equities at Nozomi
Securities in Japan.
Japan's biggest bank Mitsubishi UFJ Financial Group fell as Japan's
Nikkei average struck a four-month closing low.
It also came under pressure from weak exporters after the dollar
hit a fresh 14-year low against the yen. The Australian and New
Zealand dollars retreated.
Oil extended Thursday's decline to tumble below $US75 a barrel.
Shanghai copper and Chicago grains each dropped around two
percent.
Shares in HSBC Holdings, one of the bookrunners on an outstanding
$7.7 billion Dubai World loan, dropped more than seven percent and
Standard Chartered losses topped six percent.
The London listed shares of the two lenders led the biggest
tumble in European bank stocks in six months on Thursday.
The Dubai crisis could have a meaningful impact on banks across
Asia, said Daniel Tabbush, Asia banks analyst at CLSA in Bangkok,
listing Standard Chartered, HSBC and Singapore's DBS Group as the
most exposed in the region.
DBS shares were not traded due to a market holiday in
Singapore.
China State Construction International ICICI Bank were among Asian
banks that said they had no exposure to Dubai after their shares
fell.
Builders, such as Australian construction firm Leighton Holdings,
took a beating on concern that money due from Dubai's grandiose
construction projects, including the world's tallest building,
would not be paid.
