Default. In finance, default occurs when a debtor has does not meet his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant (condition) of the debt contract. A default is a failure to pay back a loan. It may occur if the debtor is either unwilling or unable to pay their debt. This can happen with all debt obligations including bonds, mortgages, loans, and promissory notes. (wikipedia)
This term was rarely heard of the good old days and was used only in textbooks not on Wall Street. After the collapse of Bear Stearns in the summer of ’07 and later Lehman Brothers, this term has been used in the papers daily. The wave of defaults has reached us here in the GCC on September of ’08 and what seemed to be impossible became so realistic as many companies became on the verge of bankruptcy. Reality has gotten uglier since governments and government-related entities (GREs) became new default candidates.
What will happen if Dubai World really defaults?
- Foreign investors will not be willing to invest and participate in the UAE credit market. This will spill0vver to Abu Dhabi and even prevent Abu Dhabi’s USD1 trillion spending program in the next decade owing to the fact that funding from local banks will be insufficient.
- Due to the added risk factor, cost of funds will be significantly higher specifically in Dubai, Abu Dhabi, and general GCC.
- The downgrade on several UAE GRE’s by rating agencies, making them non-investment grade securities, will plummet their prices as many global fixed income funds will liquidate non-investment grade securities.
- Creditors will force Dubai World and Dubai Holding to FIRE sell international assets, recognizing severe losses as most investments were bought at peak prices.
- GCC markets as a whole will feel the torment, as the banking system will fracture due to the high exposure to UAE GREs. This will further deteriorate loan books, thus adding further to the write-downs and possible bankruptcies, causing both equity and fixed income markets to collapse.
- The international community will begin to question the integrity of the UAE government and their dedication to their entities, which will lead to further FDI outflows.
(1 votes, average: 5.00 out of 5)
Loading ...Tags: abu dhabi, Default, dubai, GCC, Nakheel, UAE, United Arab Emirates
Unsurprisingly I would take issue with your analysis.
Abu Dhabi and Dubai are seen as entirely separate entities, we have seen the disconnect in CDS for years.
I would imagine there would be no change in financiers thinking, due to problems that were easily seen by one and all.
Movements in regional stock markets have also shown the disconnect.
[Reply]
Saud Reply:
December 14th, 2009 at 1:19 am
I agree with you that AD and Dubai are seen as different entities, nevertheless they are the same country; and HH Mohammed bin Rashed clearly stated in his press conference last November that each state will support the other. Again, I agree with you that they are seen from the eyes of investors as different entities but I would have to say that they may not have a direct effect on each other but thy do share the same fate and AD will be negatively affected.
Sure if Dubai is oversold financiers would seek the opportunity to invest back, and even though as you say the problems were easily seen, investors had a bigger risk appetite for GREs due to their belief that AD will back them up. Now AD is not only looking the other way around, Dubai government said that it is not financially responsible for its related companies debt obligations.
Moreover, many listed companies in AD and the GCC have exposure on Dubai so fundamentally they will be hurt as well.
[Reply]
Rupert Neil Bumfrey Reply:
December 14th, 2009 at 9:53 am
Hi Saud,
Thanks for responding and here we are 24 hours later with Auh having sent Wells Fargo up the road with $10b!
Did any of us, collectively written, see that coming from left field? I certainly didn’t, as my view was that Auh had left Dxb “strung out to dry”, having only remitted $1b in late November.
Possibly the wise words of Mr Al Suwaidi, UAE Central Bank Governor, plus other Auh voices prompted this dramatic change in policy.
Today on Twitter many are saying this is a time for celebration, inevitably my calls for this to be a time for reflection are derided! Such are people.
Hopefully Dubai will now follow the words of the statement issued: http://www.reuters.com/article/idUSLDE5BD01A20091214?type=marketsNews
Best wishes to all your readers for 2010,
Rupert
[Reply]
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