Wednesday, November 05, 2008

Market says there is 34% chance Dubai will default

Others disagree with the market's assessment.

Dubai's total external debt obligations, estimated at $60.6 billion, are well within the parameters set by international agencies, investment bank EFG-Hermes said.

Seeking to allay "significantly overblown concerns" about Dubai's credit position, the bank said in a research report that as a ratio to the emirate's fiscal revenues, it saw little to suggest that the debt level was either unmanageable or unsustainable.
The bank said since Dubai's debt obligations are well within the parameters set by international agencies, the significant widening in Credit Default Swaps (CDS) spreads for Dubai-based institutions (which effectively imply a 34 per cent probability of sovereign default) was unwarranted and "current concerns over Dubai's level of indebtedness to be significantly overblown. Most importantly, perhaps, the bearish market perceptions on Dubai's indebtedness appear to ignore that the vast bulk of debt is held by profit generating commercial enterprises."

The bank said the widening CDS spreads was due to high risk aversion, poor transparency and disclosure, and relatively low liquidity. "While we see a low risk of a credit event related to the Dubai government, we believe it is worth reminding investors the scale of federal assistance that is potentially available to the emirate: the overall debt obligations for Dubai are slightly below our projected federal government budget surplus in 2008 alone.
Emphasis added.


Blogger nzm said...

The same bank also expects property prices to fall.

1:22 AM  
Blogger ReMo said...

No where else in the world, does the debt of a state/province not become the debt of a country. Abu Dhabi is flush with funds, but Dubai's balance of payments is tilting... I think its time the UAE starts acting as a country rather than as different emirates.

12:57 PM  

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