Sunday, November 29, 2009

Dubai's Financial Crisis


For those of you unaware, late last week Dubai surprised the financial markets when it asked creditors of Dubai World to agree to a six-month standstill on debt payments for debt totaling > $80 Billion.

In a world of bailouts totaling many tens of trillions thus far, $80 billion certainly seems like a pittance, but many believe this is a black swan event that will parallel the panicked collapse of Lehman Bros - where the contagion spread like a fast moving virus, stoking global credit market fears and paralysing the world economy...



If that is indeed the case, get ready for global economic crisis phase 2 (remember March 2009?). I suggest you keep your eye on the markets in the coming days and weeks, get conservative if you haven't already done so and prepare yourself for the worst...

Bottom line: That light at the end of the tunnel - the one our political and corporate controlled media system keep harping about - may certainly be near, but unfortunately it's not what they had anticipated - it's actually a high speed, fully ladened, out of control freight train coming right at us... Are you ready??

DUBAI, United Arab Emirates Just a year after the global downturn derailed Dubai's explosive growth, the city is now so swamped in debt that it's asking for a six-month reprieve on paying its bills —causing a drop on world markets Thursday and raising questions about Dubai's reputation as a magnet for international investment.

The fallout came swiftly and was felt globally after Wednesday statement that Dubai's main development engine, Dubai World, would ask creditors for a "standstill" on paying back its $60 billion debt until at least May. The company's real estate arm, Nakheel — whose projects include the palm-shaped island in the Gulf — shoulders the bulk of money due to banks, investment houses and outside development contractors.

In total, the state-backed networks nicknamed Dubai Inc. are $80 billion in the red and the emirate needed a bailout earlier this year from its oil-rich neighbor Abu Dhabi, the capital of the United Arab Emirates.


13 Comments:

At 11/29/2009 9:53 AM, Anonymous Lars in Florida said...

Randy, good post.

Are there any parallels between the rapid building in Dubai and that of Las Vegas? How do they compare?

 
At 11/29/2009 10:18 AM, Blogger Randy said...

Lars,

Parallels? ABSOLUTELY! Both booms were based on an artifical reality and economic model where cheap/easy credit combined with increasing property values would continue into infinitum...

The main difference is: The US still owns the World's reserve currency and - through a myriad of bailouts mechanisms - has provided a backstop to our imploding US debt markets, whereas in Dubai they have no such luxury and bankruptcy is against the law - meaning ALL debts are supposed to be repaid - that will never happen now and the contagion WILL metastasize across the globe - where much of this unpayable debt is owned...

Hope this makes sense

 
At 11/29/2009 10:46 AM, Blogger Quadrillion said...

Seems like a palm tree in a bubble to me...

 
At 11/29/2009 1:04 PM, Blogger Rob said...

Keep up the good work Randy. Sell stops on all equities will help preserve gains,...and then buy gold and silver,..:)

 
At 11/29/2009 2:12 PM, Blogger BxCapricorn said...

Great answer to Lars. HSBC and RBS have the most exposure to Dubai World, and are owned by the country of England, in large part. If Dubai's neighbors do not pony up, my theory that Eastern European real estate loans would break Western European banks, was incorrect. I'll be watching the very heavily leveraged Chinese, for their bubbly reaction. This is going on at the same time the Greeks hit the wall. Watch the bond spreads worldwide, and the LIBOR. Credit's going to get tight again, the VIX and VXO will rise. The GS robots are going to fake a fight, and let it drop. All those folks that moved money back into equities, in their retirement savings accounts, listening to the financial media talk up recovery, and inflation, while talking down T-bills, bonds, and safety, are going to get Cramer-creamed.

 
At 11/29/2009 4:41 PM, Blogger Willy2 said...

MISH already wrote about Dubai in early 2008.

Here

 
At 11/30/2009 11:05 PM, Anonymous T Z said...

The amount of Dubai debt is significant but not large enough to be even a small Black Swan. Also, it is well-known Dubai real estate is in trouble and everybody expect the 'rulers' to work out a resolution plan. But this did not happen.

What *could* be a Black Swan is how Dubai handle its crisis. Contrary to all expectations, the Dubai government has announced it has no responsibility for Dubai World's finances. This is shocking. As such, it ensures eventual bankruptcy of Dubai World if nobody in UAE comes to the rescue.

In Dubai, you are arrested immediately if you defaulted on even a tiny personal debt such as a month's rent. Dubai World default will trigger mass arrest of the entire gang and complete liquidation. Government repudiation also means all other major Dubai projects are now on their own, and exposed to severe risks of default from the Dubai World liquidation repercussion. The situation is like the US housing defaults, where one feeds on others to cascade an uncontrolled meltdown.

This cascade of defaults, my friend, is an authentic Black Swan. Because it is completely unexpected and deemed 'impossible' for a place like Dubai or the UAE.

 
At 12/01/2009 5:21 AM, Blogger Randy said...

Superb Analysis TZ - thank you for sharing with all of us

 
At 12/01/2009 7:22 PM, Anonymous T Z said...

Let's review their debts (extracted from financial sites).

====================
Debt:
United Arab Emirates (via Bank of America - Amortization figures only):

Total Debt: $184 billion

of which...

Dubai: $88 billion
Abu Dhabi: $90 billion

Dubai:

Due in:
2010: $12.0 billion
2011: $19.0 billion
2012: $18.0 billion
2013: $ 7.5 billion
2014: $ 5.5 billion

Abu Dhabi:

Due in:
2010: $ 8.5 billion
2011: $14.7 billion
2012: $10.0 billion
2013: $12.4 billion
2014: $ 9.4 billion

UAE:

Due in:
2010: $22.0 billion
2011: $34.7 billion
2012: $29.0 billion
2013: $20.3 billion
2014: $14.9 billion

Dubai World:

Total Debt $26.5 billion
Due in next 36 months: ~$20.4 billion

Creditors:

Of United Arab Emirates (By Origin via Credit Suisse citing Bank for International Settlements):

United Kingdom: $50.2 billion
France: $11.3 billion
Germany: $10.6 billion
United States: $10.6 billion
Japan: $ 9.0 billion
Switzerland: $ 4.6 billion
Netherlands: $ 4.5 billion

Of United Arab Emirates (By Entity via Credit Suisse, citing Emirates Bank Association):

HSBC Bank Middle East Limited: $17.0 billion
Standard Chartered Bank: $ 7.8 billion
Barlays Bank Plc: $ 3.6 billion
ABN-Amro (RBS): $ 2.1 billion
Arab Bank Plc: $ 2.1 billion
Citibank: $ 1.9 billion
Bank of Baroda: $ 1.8 billion
Bank Saderat Iran: $ 1.7 billion
BNP Parabas: $ 1.7 billion
Lloyds: $ 1.6 billion

================

Note payment schedule for the next few years. Note UK banks exposure. Note how stiff-upper-lip UK PM Brown described his country's bank exposure to UAE/Dubai. Although not a very smart man, Gordon Brown intelligence is more than enough to comprehend the impossibility of payment given Dubai economic downturn.

I can see two big words written on his forehead: Black Swan

A desert land next to hot waters of the Gulf. A cold swamp land next to the brutal North Sea. Both are feeding grounds of the Black Swan.

 
At 7/08/2010 9:49 PM, Anonymous dubai real estate said...

Well, Quite astonished to know all this and statistics about Dubai real estate industry are really astonishing but I am still hopeful that Dubai real estate business has huge potential in it to recover from this current situation of Depression.

 
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