Dubai debt fears threaten credit crunch 2 — and RBS is exposed
By Daniel at 28 November, 2009, 3:09 pm
The spectre of “Financial Crisis 2” continued to loom over global markets yesterday after Dubai’s revelation that it may not be able to meet its debt obligations.
Stock markets in Asia and the United States fell sharply while the dollar and Japanese yen rose as investors shifted their money to their perceived safety.
UK banks were also revealed to be the biggest lenders to the United Arab Emirates, which includes Dubai, with more than $50 billion owed by the Gulf state’s residents.
In another blow to the beleaguered UK banking sector, the Royal Bank of Scotland emerged as the largest single loan-arranger to Dubai World, the state-owned conglomerate that sparked this latest financial crisis when it sought a standstill on its debt repayments on Wednesday.
RBS, which is owned by British taxpayers, has arranged loans worth up to $2.3 billion to Dubai World.
The Financial Services Authority, the regulator, is understood to have sought assurances from banks that their exposure to Dubai will not threaten their financial strength. The FSA said it would continue to keep a close eye on the situation.
Dubai World, which owns a range of assets including the Turnberry golf club in southwest Scotland, sparked panic when it asked for the debt standstill. The company has liabilities of $60 billion and its Nakheel property division, which built the Palm Jumeirah development where the footballers David Beckham and Michael Owen own houses, was due to repay a $3.5 billion bond next month.
The standstill has raised the prospect that Dubai World and, by extension, the government of Dubai might default on their debt.
As the drama in Dubai has unfolded, financial traders have had to come to terms with the possibility that other countries may also struggle to repay their ballooning debts in coming months.
This has sparked fears that we may be entering another phase in the financial crisis should lenders take fright and hold on to their cash rather than lend it, leading to another seizure in the world economy.
“If you look to government balance sheets around the world you’ll find plenty of potential banana skins,” said Jim Reid, strategist at Deutsche Bank. “Given the nature of this crisis the probability of further sovereign events remains elevated.”
Bank of America analysts also warned that Dubai’s crisis could trigger a wider problem as countries default on their debts, resulting in a “major step back” in the global economic recovery. Another analyst dubbed this scenario “Financial Crisis 2”.
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http://business.timesonline.co.uk/tol/business/markets/the_gulf/article6935620.ece
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