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Dubai Default Risk

As shown in the Bloomberg snapshot of Dubai's historical sovereign debt credit default swap price, the recent spike up to 600 bps or so isn't even near the level of 1,000 bps seen earlier this year.  Had Dubai's default risk spike earlier this year been an isolated event like it is this time around, it would have made news back then.  At the time, however, default risk was spiking for the majority of developed nations as well, so Dubai was the least of our problems.  Now that global markets have stabilized and exited crisis mode, an isolated event in Dubai where default risk doesn't even spike to its 2009 highs has caused a global market selloff.


Below we highlight current credit default swap prices and the year-to-date change for the sovereign debt of 39 countries.  As shown, default risk has declined for every country except Japan in 2009, including Dubai.


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Reader Comments (8)

Lets think about these credit default premiums for a minute. If any o these countries actually did default who has the cash to pay off the holders of the debt? Back in the muck we are.
November 27, 2009 | Unregistered CommenterNorman
Would like to see the Default Risk for Canada included in this chart as well if you could.

Thanks and appreciate all the work you do.

November 27, 2009 | Unregistered CommenterBB
November 24th.Investors have taken out more insurance against default by Italy’s government than against any other country’s, according to DTCC, a firm that clears derivative trades. It reckons that credit-default swaps (CDSs), a form of insurance, cover a notional $23.7 billion of Italian bonds once offsetting contracts are netted out. Nine of the top dozen countries ranked by DTCC are in the euro zone. Italy ranks first partly because it has one of world’s biggest debt burdens. Thrifty Germany is surprisingly ranked third. Greece and Ireland make the list, even though their public bond markets are far smaller. The size of these CDS positions are explained by fragile public finances: CDSs are a way of betting on default as well as insuring against it....BB ,Canada has no risk because you the tax payer has bailed out the ABCP market to a tune off 32 billion
November 27, 2009 | Unregistered Commenterdj
BB: They don’t have access to the CDS price data for Canada
November 27, 2009 | Unregistered CommenterDavid
good post. but to add a twist to your data interpretation /presentation , let me turn this `harmless` post in a scary one!just see Present CDS(current-first column) vs CDS at start of 2008 ( last column), then we can see sharp spike in CDS spreads.US - up 4x from 8 to 32UK - up 8xAustria - up 9xSpain - up 4xGermany - up 3.5xItaly - up 4xPoland - up 6xso after Dubai, who is next ?
November 27, 2009 | Unregistered CommenterDjvu
It stinks not having oil.Dubai Background

Dubai is one of 7 Emirates that make up the United Arab Emirates. Abu Dhabi, with huge energy reserves and a sovereign wealth fund thought to be worth $630 billion, is the richest of them. Its banks are major creditors of Dubai and its companies, but news that they are no longer willing to keep buying or refinancing the debt of Dubai’s major companies shocked the global markets.

Dubai and U.S. Housing Speculators Play the Same Game

Dubai has very few energy resources and raises little money via income tax due to its competitive tax policies. The state has consistently run deficits and the Emirate's growth has therefore been funded via the money markets.

A huge property-led boom saw money pile into infrastructure and construction projects (sound familiar?). Similiar to being on the cover of Sports Illustrated, building the world’s tallest building has always been viewed by investors as a sign that a local economy is about to head south.

Dubai World, the most indebted of Dubai’s state-sponsored companies, owes $60 billion of which $22 billion must be refinanced by 2011.

Worries About Impact Of Dubai Crisis Generate Substantial Selling Pressure

The U.S. stock market opened sharply lower (down roughly -3%) on Friday, November 27, 2009 in a reaction to the financial crisis in Dubai. The downward momentum comes after Dubai World asked to postpone payment on some of its $60 billion in debt. Worries about a default by the city-state have raised significant concerns about the impact on banks.

The markets closed down roughly -1.5%.

Mark Minervini Comment on Dubai Sell Off

I view short term turmoil in countries and nations outside the U.S. as a long term positive for U.S. stock and bond markets. Similar to the Asia crisis in the late 1990's, these foreign calamities highlight the relative safety of the U.S. and bolster U.S. credibility. I made this same comment during the Asian crisis, which turned out to have the same effect.

A Counterintuitive ScribeI will leave you with one counterintuitive comment by James Hillman from his book, Kinds of Power: A Guide to Its Intelligent Uses:

“Wherever we see an increase we feel its weight. All the numbers going up no longer portray the optimistic spirit, but instead indicate monstrosities, epidemics, ugliness, future disaster, extinction. Growth has taken on a cancerous tinge. To use the word now sends a message of potential danger, whether the growth be in debt, the population, the underemployed, the homeless, the dimension of cities, the size of government, the particles in the air, the tax rate, the cost of living, the cholesterol count, even the rising numbers on the bathroom scale. Going up now means decline. What was before the measure of progress has become a sign ofproblems.”

You might be thinking that this was written to describe the current economic challenges, however his book was written in 1995. Did the world recover, indeed. Will the U.S. and global growth recover this time around...indeed.

November 28, 2009 | Unregistered CommenterMichael Weiss
Might sound a bit ridiculous but the amount of debt does not sound that large to me. Given the extent of the economic stimulus packages that have been implemented, the Dubai situation looks manageable.
November 29, 2009 | Unregistered CommenterSenan

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