A country which is a thinly veiled totalitarian State,to which world has turned a blind eye because of oil,a country where Human Rights violations can not even be voiced because of monetary clout,a place where people flocked to to work for a people who do not know what to do, a Head of the country who is not accountable to any one, where economic transactions are limited to family coterie, with generous doles to foreign corporations, where ordinary citizens have been led to believe building skyscrapers could lead to their happiness, has burst.
Worst is yet to come.
Story:
Wall Street turned lower on Friday, as traders scrambled to play catch-up after downturns in Asian and European markets over the Thanksgiving holiday.
Investors were spooked by reports that Dubai World, the emirate’s investment vehicle, was seeking to suspend repayments on all or part of its $59 billion in debt. That pushed shares down more than 3 percent on European markets on Thursday; Asia markets posted similar declines on Friday.
Immediately after the markets opened, the Dow Jones industrial average fell about 230 points, but shares then started to regain ground. In the last 40 minutes of trading, the Dow was down 1.3 percent or 133 points. The broader Standard & Poor’s 500-stock index fell 1.5 percent or 16 points, and the technology-dominated Nasdaq slipped 1.3 percent or 28 points. The stock markets will close at 1 p.m. Friday after being closed Thursday for Thanksgiving. The bond markets close at 2 p.m.
The dollar was just below $1.50 to the euro, and crude oil prices fell $3.08 to $74.88 in New York trading. Treasury prices rose.
Analysts said they thought Thursday’s declines might be overdone, and that a true picture of the market’s reaction would emerge next week as buyers return from the holiday and as more details on the Dubai situation come out.
“I don’t think it’s devastating at all,” said Jeffrey Saut, chief investment strategist at Raymond James. “Nobody knows the collateral damage, but it is clear that our banks have exposure to European banks.”
A research note Friday from Credit Suisse estimated that European banks may be the hardest hit if Dubai World cannot meet its obligations, with total exposure estimated at 13 billion euros ($19.6 billion). European banks on Friday played down their exposure.
“Dubai is really a symptom, a legacy, from the previous boom, rather than symptomatic of a start of a whole new set of issues that are going to create a systemic crisis in emerging markets,” Kevin Grice, senior international economist at Capital Economics in London, said. “Markets assume the worst-case scenario.”
The uncertainty in Dubai did not suggest a coming collapse of the global real estate market, Mr. Grice said.
European markets closed slightly higher. The FTSE 100 in London was up 52 points, or 1 percent, while the DAX in Frankfurt rose 71 points or 1.3 percent. In Paris, the CAC-40 increased 42 points or 1.2 percent.
In Europe, investors were concerned about the state of public finances and possible credit rating downgrades in Greece and Ireland.
Asian markets fell. The Hang Seng index in Hong Kong declined 4.8 percent and South Korea’s key market gauge, the Kospi, dropped 4.7 percent. The Nikkei 225 index in Japan and the Taiex in Taiwan both sagged 3.2 percent. The market turmoil was touched off by Wednesday’s announcement from Dubai, one of the seven members of the United Arab Emirates, that it was asking banks to allow Dubai World to suspend its debt repayments for six months.
Dubai’s move — the global high-finance equivalent of a homeowner asking the bank to allow six months of skipped mortgage payments because of a shortage of cash — sowed fear of a contagion of instability that could roil markets that are only now recovering from the near cataclysm of the last year.
“This has sent shockwaves through the markets, even though the problems in Dubai have been known about for two years,” Emil Wolter, a Hong Kong-based strategist the Royal Bank of Scotland, said by phone from Paris.
“But it is not the trigger for a brand-new crisis. Yes, the magnitude of the situation is dramatic for Dubai. But Dubai is not America — and a property crisis in Dubai will not cause the same global crisis as a property crisis in the States.”
Some market experts noted, for instance, that while banks that have lent money to Dubai World could suffer significant losses if the company were to default on all or part of its debt, worries about the sovereign debt of oil-rich Middle Eastern countries were unfounded.
Paul Schulte, head of multi-strategy research at Nomura in Hong Kong, commented in a note on Friday: “Dubai was a carbon copy of Thailand’s disastrous foray as an ‘international financial center’ in the 1990s. Happily, the U.A.E. has oil. Thailand did not.”
Like many Western consumers during the good times, Dubai gorged on debt and borrowed too much to finance a building boom that has gone bust in the downturn.
“Dubai was fairly much the worst example of overextension. It had the worst debt per capita in the world by far,” Christopher Davidson, an expert in Gulf politics at Durham University in Britain, said Thursday. “I would like to put it down as a really enormous white elephant that doesn’t have much in common with the regular economy of a regular state.”
When credit markets froze last year, Dubai, like Iceland, found itself overextended. But Dubai, which has little oil, was backed by its Arab emirate neighbors, especially oil-rich Abu Dhabi — or so investors had assumed.
Saud Masud, head of research at UBS in Dubai, said Thursday that negotiators would feel pressure to reach some kind of deal to present to the markets before trading in the region resumes next week after the Eid holiday. The Dubai government’s total debt is estimated at about $80 billion, of which, Mr. Masud estimated, about two-thirds is held by local investors.
Mr. Schulte of Nomura commented in his note that, in his view, “it is not a matter of when but at what price Abu Dhabi will bail out Dubai.”
Mr. Wolter of RBS said he too believed Abu Dhabi would have no choice but to ultimately come to Dubai’s rescue. Until that becomes clear, though, he said, markets would remain extremely nervous.
http://www.nytimes.com/2009/11/28/business/28markets.html?_r=1&hp&emc=na
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