Dubai Troubles Loom:

As the news of Dubai made its global ripple on the financial markets, Europe stocks fell over 3% on Thursday, marking the steepest decline since this past April. Meanwhile, Friday’s opening market in the US quickly headed south, as investors ran for cover. By 9:30 the Dow had declined over 200 points, sending a troubling message to investors and non-investors alike. After several attempts to rally the Dow ended up just over 150 points down.

Dubai, known for its massive investments and development of the world’s most breath taking resort and hotels for the super rich, requested a 6-month stand still from its creditors. This sounds like nothing more than structured bankruptcy, without the stigma. Probably a wise decision, averting drastic decline in assets value and investor abandonment. Smart move. The reality remains that Investors held high hopes for high-end returns, which were reduced to pipe dreams since the Persion Gulf Debt Crisis unfolded last week.

On November 24th, the request for a stand still made to the Dubai World creditors involved interest payments on an estimated $60 billion worth of debt. The News prompted insurers to increase the cost of insuring Dubai’s debt, which was swiftly followed by Moody’s and Standard and Poor’s downgrades of the government-related entities in Dubai. Justin Urguhart Stewart, co-founder and director of Seven Investment Management, is quoted in the Wall Street Journal as saying “many [investors] have had their heads in the sand regarding Dubai”, adding that there was a lack of understanding of what the investment risks might have actually been.

To midigate fallout, the country’s government is doing everything it can to limit impact of its debt woes. Dubai United Arab Emirates(UAE) pledges to stand by Dubai foreign and domestic banks in the country. The country’s federal government, which is obviously backed by oil money, states that the UAE’s central bank has made overtures to all banks with branches domiciled in the country, making it clear that they will have access to cheap money, as well as the establishment of a special “additional liquidity” facility.

This morning, Squawk Box reported that an analyst at Credit Suisse estimated that European and American investments in Dubai amounted to only 5% exposure. That’s a relief. I am sure more will unfold as the week progresses.

K. Reilly