At present there is a diary on the rec list which is a hysterical overreaction to the crisis in Dubai.
First: the sums involved are not vast. Dubai's total debt is US$80 billion. Compare that to the $2.8 trillion in writedowns that US and European lenders have made as a result of the global credit crisis.
Second: the assumption that Western banks would be left holding the bag are false. Thomson Reuters reports that the exposure of international banks is $12 billion. Hell, that is less than they pay out in quarterly bonuses.
WSJ (subscription only) says:
The only Western bank whose exposure looks material relative to its overall loan book is Standard Chartered, but it has a robust capital position to absorb losses.
At this stage, however, the risk of contagion is small. Most at risk would be neighboring Middle Eastern markets where there has been no shortage of similarly reckless spending. Dubai's neighbors are also among its biggest creditors. But unlike Dubai, the other Gulf states have vast oil wealth, making it unlikely they will lose access to funding.
The stock markets in Europe, having had a day to digest all the news and get a better picture of the risks, are all up today. The diary on the rec list should be updated to reflect this fact.
The US markets are currently seeing a panic reaction no doubt aggravated by the inability to trade yesterday; however, this will burn off like the morning fog.
For the record: I am not Pollyanna. But any rational assessment says the Dubai standstill just isn't a big enough event to create havoc.
UPDATE: The European view, from Reuters:
European shares hit session highs in afternoon trading on Friday, with banks reversing earlier losses as markets assessed the significance of the debt problems in Dubai.
At 1442 GMT, the pan-European FTSEurofirst 300 .FTEU3 index of top shares was up 0.8 percent at 995.56 points, and had reached a day's high of 997.20, compared with the low of 971.80. On Thursday, the index fell 3.3 percent, its biggest one-day percentage fall in seven months.
Markets worldwide are digesting the implications of the debt crisis in Dubai. Analysts are split and uncertain as to what the effect will be.
"Dubai is a very special case," said Heino Ruland, strategist at Ruland Research, in Frankfurt. "It's a very specific problem, which can't be transferred to other markets. Market participants will realise that this has nothing to do with the global crisis."
As predicted, the shrugging off is under way. The Dow opened at 10450, sank to 10232 as as traders unwound some speculative positions, and now is at 10340.
Here is a much better summary of the points I was trying to make above:
if Dubai defaults on every penny of its $80 billion in debt, the write-offs that banks will take would be 2.86% of the total write-offs -- $2.8 trillion -- banks will take in the wake of the financial crisis between 2007 and 2010, according to the International Monetary Fund. But the risk to banks outside the Middle East is likely to be far less than $80 billion. According to Reuters, their liabilities related to Dubai World could be as high as $12 billion in so-called syndicated and bilateral loans. To be fair, big banks in the Middle East are exposed -- Abu Dhabi Commercial Bank by $2.45 billion and First Gulf Bank by $1.36 billion.
That is from Peter Cohan.
More shrugging. The NASDAQ opened at 2176, dropped to 2119, and now is up to 2150.
Here is an interesting perspective from a market commentator - the markets WANTED to find something to worry about, so they could justify a bit of profit taking:
We view this as quite an overreaction from global markets for what is a relatively small country and small player. Dubai is small and the level of debt we are talking about in the short-term of around USD 20 billion, and then an overall level of about USD 80 billion in the medium-term, you have to put things into context and. Just to add here, Abu Dhabi Investment Authority manages over half a trillion dollars.
So we do think that it is a big overreaction for a small country and small amount of money. But we could understand that markets have been waiting for something - any reason to take some profits and this is as good a reason as any. Therefore people just thought, let us sell and then see what happens. But we don’t believe there would be a further fall in the markets going forward.
And I'd also like to quote Kossack Larry Madill's comment from below:
Distress Over Dubai is Overblown
The media have been without a good new financial crisis for a while. So with the markets up about 60% since the March lows, it was inevitable that some bit of news would give us all an excuse to panic and believe that, once again, the end of the world was near.
People are clearly overreacting, and that’s creating a good opportunity to buy. Here’s why:
- Dubai World’s debt of $60 billion compares to Lehman’s exposure of more than $1 trillion when it collapsed. When Fannie Mae (FNM) and Freddie Mac (FRE) were rescued, they were guaranteeing over $5 trillion in mortgages. When American International Group Inc. (AIG) was rescued, it had over $200 billion in credit default swap exposure. Similarly, Citigroup Inc. (C) and Bank of America Corp. (BAC) had hundreds of billions in potential exposure. Now, the U.S. stock market is higher than when all of those entities were rescued. A $60 billion debt turning sour doesn’t (or shouldn’t) shock us anymore, and the exposure of U.S. banks to this mess is minimal at best.
- What in fact is the banking world’s exposure to Dubai? From a Goldman Sachs report on Dubai issued Thursday: "We estimate the potential credit losses to HSBC and STAN at US$611 million and US$177 million – or 4.6% and 3.9% of 2010E NPAT, 0.5% and 0.6% of 2010E equity." In other words, nothing.
- Plenty can happen between now and Monday. Dubai could come to agreements with its creditors on the $10 billion, give or take, that is due in the next month. Abu Dhabi, which has already agreed to lend Dubai $5 billion, has over $650 billion in assets. Abu Dhabi will certainly negotiate agreements with the creditors and buy debt for 60 to 70 cents on the dollar, avoiding the default of its strategically placed neighbor. In return, Abu Dhabi will get massive political concessions from Dubai.