Eid's pause won't help Western Banks as Dubai reels

The markets are closed in Dubai today for Eid. After a crazy 36 hours on the local trading desks, the respite will be particularly welcome; even if Sunday is coming.

A friend of mine emailed yesterday: what impact could this Dubai default have on North American financial institutions with no direct exposure to the Middle East region? Good question, but we agreed that the better question is “even if I have none, what exposure do my counterparties have to Dubai World’s US$59 billion of debt?”

Global banking shares are selling off in Asia and Europe to the tune of 4-8%. Yowsa. Nakheel, a real estate arm of the Dubai government, has seen its bonds fall from 110 to 40 cents in just two days. Its motto? Where Vision Inspires Humanity. With US$60 billion of real estate developments in some form of delivery, Nakheel’s situation is unlikely to play second fiddle to the resolution of Dubai World’s challenges. The workout will be inspiring.

The good news is this. There doesn’t need to be too many internal meetings amoung various local Boards for the leading corporate entities of Dubai to devise a plan to address this situation. In a post last year (see prior post “Gulf Trip: Day Three” Dec 3-08), I wrote that:

“Although there are a myriad of companies and players, at the end of the day, most of the property and businesses are owned by His Highness Sheikh Mohammed bin Rashid Al Maktoum. He is the bank, government, benefactor and visionary all rolled into one.”

That reality will likely remove any bureaucracy from the process to come. “Sheikh Mo” isn’t going to allow his dream for the City to fail.

The easy advice to give the investor relations groups at North American banks is that they should quickly advise equity research analysts what your banks’ specific exposure is to Dubai World (US$59B in loans outstanding) and Nakheel. If you don’t, folks might assume the higher figure than is actually the case. Although a good start, it won’t really address the core concern that will rattle the markets over the coming weeks. Even if I don’t have any direct exposure, what exposure do my counterparties have? And can they withstand any material writedowns when the auditors sit down at the end of the coming fiscal quarter? Although two-thirds of Dubai World’s debt is held in the MENA region, the world of finance is one when trouble hits.

With a liquid market for this type of debt, bank auditors will be hard pressed to avoid marking Dubai World and Nakheel debt to “market”. The excuse that could be applied to the illiquid subprime mortgage market earlier this year won’t work here. As the 1980s Mexican debt workout proved, things can ultimately wind up fine for all concerned. But with no oil to export, and an economy that relies on finance and real estate, Dubai’s situation will require some patience by the banks involved.

Hang on to your hats.

MRM
(disclosure – Decade of Daddy Mirror Fund is exiting its financial shares at the open)