Are banks a safer bet than government entities in the United Arab Emirates? Three pieces of news today suggest so.
First, the cost of insuring against sovereign Dubai default has shot past its November 2009 levels – i.e. when the Dubai World/Nakheel problems were afoot. Read more
Sovereign debt in Dubai is seen as riskier now than it was last November, during the Nakheel crisis. The cost of insuring Dubai debt is now 6.62 per cent*, meaning it costs $662,000 to insure $10m Dubai sovereign debt against default. A month ago today, it cost $415,000. But current rates are some way off their highs a year ago, when it cost $940,000.
Markets are pricing in more risk after news emerged that creditors of Dubai World might receive just 60 per cent of their investment back. The rising cost of insurance is not due to illiquid trading: Dubai CDS volumes are high and increasing (see chart). Read more
The Gulf is so much more exciting. Abu Dhabi today announced a $10bn injection to a fund for younger brother Dubai. The first action for the fund will be a $4.1bn payment of Nakheel sukuk obligations due today. No carefully timed, carefully worded press releases to minimise market shock: a slam dunk, last minute rescue. Phew!
Stocks around the world have risen, but S&P said it was unlikely they would raise ratings of the six government-related entities downgraded on December 2 (Bloomberg).
A summary of the support from Abu Dhabi and the UAE central bank: Read more
Last night Axel Weber, Bundesbank president, showed mastery of the art of central banking at a dinner hosted for Frankfurt’s business journalists. That is a polite way of saying that he was charming, happy to discuss issues at length – but circumspect.
On Greece’s rating downgrades, Mr Weber pointed out the urgency of Athens exerting greater fiscal discipline. But despite lots of questions - highlighting growing German concern about Greece - he was not explicit on whether the ECB would ever actually exclude Greek assets from its liquidity-providing operations (which would be a risk if the ECB returned to pre-crisis minimum rating standards after 2010).
Mr Weber was soothing on Dubai, pointing out that Read more
Competitive devaluations threaten trade wars, says Michael Pettis, citing the Vietnamese devaluation. The theory is that countries unable to devalue will be forced to raise tariffs. This comes as North Korea strikes two zeros off its currency, the won. But the picture is more complex than that. Chris Giles agrees that competitive devaluations could lead to currency trade wars, but argues the devaluation of the dong – still under pressure – is not the trigger. Neither is the won.
Creditors of Dubai World, including hedge funds and banks, have formed a group. It seems that investors in $3.5bn of Nakheel’s bonds will form 25 per cent of the issue, meaning they can block bond restructuring plans. Read more
$172bn is too big a number to ignore. Marla Singer has trawled through footnotes and found that the Fed may be exposed to European banks via swap agreements made by the banks with failed insurance giant AIG. It’s not definite, but it’s big if it’s true.
The argument runs as follows: (1) European banks arranged swaps with AIG Read more
“Investors view this as shockingly bad news”: one assessment of Dubai’s request for a freeze on all financing to Dubai World, the government’s heavily indebted flagship holding company. The requested freeze would last till May 30, and would cover DW’s troubled property unit Nakheel, which is due to pay back $4bn on an Islamic bond on December 14. Dubai sovereign CDS spreads rose 130bps from an overnight level of 318 and LSE shares fell – the exchange has a 20 per cent stake in Borse Dubai.
Meanwhile the “gold up, dollar down” trends continue. Sri Lanka has bought 10 tonnes of gold from the IMF Read more