Markets shudder at unforeseen Dubai debt standstill

STOCK MARKETS around the world were convulsed yesterday as investors scrambled to understand the implications of Dubai World’s restructuring and unexpected debt standstill.

Shares in Dublin fell by almost 3 per cent and the price of Irish Government bonds fell as concerns about peripheral European markets resurfaced.

The lack of information on Dubai’s flagship government-owned holding company, made worse by a religious holiday in the Middle East, prompted indiscriminate selling of stocks linked to the region. The cost of insuring against default in emerging markets around the world also leapt.

“In the absence of definitive information it’s hard to see the market treating this as an isolated one-off,” said one trader.

With trading volumes low because of the Eid holiday and the US Thanksgiving break, investors moved into safer assets, pushing up prices of traditional havens such as government bonds.

Yields on German 10-year bunds, the benchmark for Europe, fell 10 basis points to 3.16 per cent, while equities were battered. The pan-European FTSE Eurotop 300 fell 3.2 per cent, while in London the FTSE 100 dropped 3.18 per cent – its worst one-day fall in almost eight months.

Financial stocks were the worst-hit sector, dropping 5.3 per cent as investors rushed to quantify their exposure to Dubai and the wider region. Barclays shares fell 8 per cent to 291.1p.

Investors said a paucity of detail on the debt standstill, announced on Wednesday, was the key factor sparking the wider turmoil. But DP World, one of the world’s top port operators controlled by Dubai World, said that it was excluded from the restructuring. A conference call for bondholders of Nakheel, the Dubai-owned property firm at the centre of the storm, collapsed after lines were swamped. Nakheel, wholly owned by Dubai World, is due to redeem a $3.5 billion (€2.3 billion) bond next month. The conference call was organised by QVT, a New York hedge fund. A fund executive confirmed it was reorganising the call with a greater phone capacity, but declined to comment further.

“People are panicking: this whole process counters everything that the rulers have been saying, and the way it has been communicated before the holidays so no one can get any information is confusing,” one hedge fund manager said.

The cost of insuring Dubai’s debt against default jumped sharply, up $80,000 to $500,000 annually for every $10 million of debt covered for five years. It was the biggest jump since the contracts were launched in January. Investor attention focused on how far Abu Dhabi would stand behind Dubai.

“The credibility of Abu Dhabi to support Dubai with respect to its financing needs is dented, in our view, eroding the main pillar of Dubai’s creditworthiness,” said Alia Moubayed, strategist at Barclays Capital.

Other Gulf states were also under market pressure. But the damage was not confined to the region, and other emerging markets with perceived problems were hit. Hungary, which has had problems refinancing debt, and Greece, with one of the highest debt burdens in Europe, also saw their insurance costs jump. – (Copyright The Financial Times Ltd 2009)