-
U.A.E. Will Support Banks in Dubai Credit Crisis
MUMBAI — The United Arab Emirates central bank on Sunday said that it stood behind domestic and foreign banks operating in Dubai after last week’s announcement that Dubai World needed more time to pay back some of its $60 billion in debt.
Dubai surprised the financial world on Wednesday when it said it would ask creditors of Dubai World, the conglomerate behind its rapid expansion, to agree to a six-month standstill on the debt. Global markets sank on the news.
On Sunday, the central bank said it set up a “liquidity facility” for the Dubai banks, and tried to reassure investors that the banking system there was more sound and liquid than a year ago.
Whether these moves will restore investor confidence remains to be seen as soon as Monday, when most U.S. traders return from a long holiday weekend.
In recent days, investors have begun worrying that Dubai’s debt troubles might be the first in a series of panics in developing countries that borrowed too much money in the past few years — much as in 1997, when Bangkok became the first capital to crumple in the Asian financial crisis.
Many analysts said their biggest worries were not about whether Dubai would fully repay its lenders, or how much assistance it would receive from its neighbor Abu Dhabi. Rather, these people said, their main concern was what Dubai’s problems said about the rest of the world.
These analysts fear that while Dubai may have spent its borrowed money more extravagantly than most, it is far from alone in having taken on too much debt for dubious real estate projects. Investors have already raised alarms about debts in Ireland, Greece and East European countries.
During the shortened U.S. trading day Friday, the first since the Wednesday announcement by Dubai that it was seeking more time to repay billions in loans, investors sold bonds of other emerging markets and drove up the price of insuring against a default by those same countries.
If investors’ fears about a crisis in emerging markets were realized, it would be a severe setback to a fragile global economy that has yet to fully recover from the credit crisis last year.
“Dubai could be the beginning of a series of sovereign debt issues or crises,” said Mohamed El-Arian, chief executive of Pimco, the giant bond-trading company. “What Dubai is going to do is make people think more intensely about the lagging implications of last year’s crisis. It’s going to be a wake-up call to the people who thought that the financial crisis was just a flesh wound.”
Mr. El-Arian and other investors said that the full effects of the financial crisis had been masked in recent months by government spending and bailouts. But those interventions have not solved problems in commercial real estate, as demonstrated by Dubai’s challenges. “The consequences of the financial crisis are going to play out for a while,” he said.
Investors will probably begin to focus on the troubles of individual countries, banks and companies. Analysts say they expect the scrutiny to fall hardest on countries that have already been flagged for their financial weaknesses. That group includes Ireland, Greece, the Baltic states, Ukraine, Pakistan, Romania and Bulgaria.
There will be also be “recognition that for the first time in decades, there are sovereign risks among developed Western countries,” said Nouriel Roubini, the New York University economist who predicted last year’s financial crisis, referring to Ireland and Greece.
Simon Johnson, a former chief economist at the International Monetary Fund, said that the cost of insuring against defaults by big Irish banks had risen quickly since the Dubai announcement.
What that means for those countries is that they will not be able to raise money easily or inexpensively. It could also put pressure on stronger members of the European Union to bail out weaker members, or at least help them restructure their debts and nurse them back to health.
“I think the main issue here is that governments that are in trouble are going to see people getting tough with them,” Mr. Johnson said.
Yet, Dubai’s problems could also be a boon for some emerging economies, like India, Brazil and China, that are not heavily indebted to overseas investors and which have large populations that are buying more goods and services. Investors have been pouring billions of dollars into those countries in recent months and are likely to increase their allotment to them as they shift away from financially troubled countries.
While that might appear to be a boon for the favored group, Eswar S. Prasad, an economist at Cornell University in New York State, said that those countries might not be well prepared to handle the extra cash. Stock and real estate markets already appear overheated in India and China, for instance.
“Overall, the Dubai debacle is not good for emerging markets in the short run not because it will lead to capital inflows drying up,” Mr. Prasad said. “But rather because it will push more capital towards emerging markets that are already having a tough time managing huge inflows and away from those that need more external financing.”
Some analysts said the comparison to Bangkok in 1997 might be overblown. These people say that Dubai’s borrowing and growth was very different from what other emerging markets were doing in the past few years. Thailand in the 1990s, by contrast, followed an economic development model that closely resembled the approach taken by other Asian countries like Indonesia, Malaysia and the Philippines.
For instance, Dubai in recent years was importing dollars and people to build, live and work in its new gleaming glass-and-steel towers, as it sought to remake itself into a regional financial and economic hub from a sleepy trading outpost.
Yes, there was froth in other emerging markets, these analysts said, but many of them, like India, followed a different approach and pursued more pedestrian ambitions than did Dubai.
These countries borrowed to build factories, infrastructure and service businesses to employ their existing and growing populations.
“Dubai was particularly flaky in the sense that it seemed to be trying to make something out of nothing,” said Ila Patniak, a senior fellow at the National Institute of Public Finance and Policy in New Delhi. “When I think of India, I don’t think it’s going to hit us so much. We are really not doing the things that they were doing.”
Subscribe to:
Post Comments (Atom)
![[Valid Atom 1.0]](valid-atom.png "Validate my Atom 1.0 feed")
This is a great reading. Thanks for sharing this information. We have few readers who would like to read this stuff. We will pass it on to our readers for more feedback. We are dealing with seo firms and would like to get feedback from you too. This is a nice postings indeed. Thanking You. ireland search engine optmization