Dubai debt crisis: Now British banks face

fresh crisis after investing billions

By Liz Hazelton
Last updated at 4:57 PM on 27th November 2009
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• Barclays, RBS and HSBC face losing billions

• Wall Street plummets by 2 per cent after late opening
• FTSE falls by 1.5 per cent before stabilising
• Banks see £14billion wiped off market value in one day
• Dubai may consider selling QE2 to tackle debt
British banks were teetering on the brink of a fresh meltdown today after it emerged they had
invested heavily in crisis-hit Dubai.
An $80billion debt default in the emirate has already reawakened the spectre of a global
'double dip' - that the first shoots of recovery could be wiped out by a second wave of
recession.
But the level of exposure that the crippled British banking sector faces is now under renewed
scrutiny.
The crisis was prompted by Dubai World, the development company behind three palm
shaped islands as well as an off-shore replica of the globe , defaulting on its debt.
Today it emerged that:
• Royal Bank of Scotland (RBS) was Dubai World's biggest loan arranger since
January 2007, according to JP Morgan
• HSBC has an estimated £9.6billion in loans and advances to UAE customers
• Barclays has an exposure of around £3billion
Another bailout? Gordon Brown (right) meets Dubai's ruler Mohammed bin Rashid Al
Maktoum at Downing Street earlier this week
The figures are particularly alarming as the sector has had to be bailed-out by the tax payer
on a number of occasions over the last year-and-a-half
Earlier this month, RBS and Lloyds Banking group received another £50billion to keep them
afloat
RBS - which has received the biggest state rescue anywhere in the world - is now effectively
owned by the taxpayer.

More...
• Brash, flash and built on a mind-boggling scale, it was a monument to vanity and
greed ... now Dubai is sinking under £48bn debts
• Recession 'is even worse than feared': Chancellor predicts steepest slump ever
• TRAVEL MAIL: Don't worry about the financial demise of Dubai...just enjoy the cut-
price holiday bargains
As the money markets continued to falter, Gordon Brown moved to dispel investors' panic,
claiming that he believed British banks were 'well-capitalised'.
Speaking at the Commonwealth summit in Trinidad, Mr Brown said: 'I think we will find this
is not on the scale of the previous problems we have dealt with.'
Asked if the Dubai situation could spark a 'double-dip' recession, he said: 'You are obviously
going to have setbacks with a bank here or an organisation there which has had problems, but
I do believe the world has a better way of monitoring what is happening, so we can be sure
that - despite setbacks - we will continue to go forward.'
Enlarge
Under construction: While the world's tallest tower the Burj Dubai nears completion, many
ambitious building projects have come to a standstill

Abandoned: A filthy car left behind at Dubai airport after its owner became one of many ex-
pats who fleeing the country after the bubble burst
Stock markets around the world have endured another turbulent 24 hours.
Wall Street plummeted 2 per cent when it opened at 2.30pm GMT this afternoon.
In London, the FTSE fell around 1.5 per cent first thing after a 3 per cent fall yesterday wiped
almost £44 billion from blue-chip stocks.
The index recovered its poise to stand 0.5 per cent lower after the first hour of trading. It was
at 5188.73 at 12.45pm, down from 5194.13 at start of trading this morning.
In Frankfurt, the Dax index fell 1.32 per cent to 5,540.34 while in France, the CAC lost 1 per
cent to 3,639.66.
Asian markets were also under pressure overnight as Hong Kong's Hang Seng fell more than
5 per cent and Japan's Nikkei was 3 per cent lower.
Banks worldwide saw £14billion wiped off their market value yesterday.
Dubai's rulers have done their best to calm fears, claiming the situation was under control.
Sheikh Ahmed bin Saeed al Maktoum, the uncle of Dubai's ruler Sheikh Mohammed bin
Rashid al Maktoum, said: ''Our intervention in Dubai World was carefully planned and
reflects its specific financial position.
'The government is spearheading the restructuring of this commercial operation in the full
knowledge of how the markets would react.
'We understand the concerns of the market and the creditors in particular.
'However, we have had to intervene because of the need to take decisive action to address its
particular debt burden.'
There were reports today that the emirate may consider selling the QE2, bought for
$100million in 2007, to tackle some of its debt.l

Enlarge
Emirati traders react as they monitor data on screens at the Dubai Financial Market yesterday
A man in front of a Korea Composite Stock Price Index in Seoul this morning
Much of the debt default falls on Dubai World, which owns property developer Nakhell.
As of August, the conglomerate had $59billion of liabilities which it now hopes to avoid
redeeming for six months.
Analysts had expected that the Dubai's oil-rich neighbour Abu Dhabi would offer financial
support.
But Dubai may have to abandon an economic model that focused on developing swathes of
desert with foreign money and labour.
Even the prospect of an Abu-Dhabi-backed bailout did little to allay concerns among
investors, already worried the global economy may not be recovering quickly enough to
justify a near doubling of prices for emerging market stocks and many commodities since
March.
Tokyo traders have already dubbed the development Financial Crisis Part II.
'The panic button's been hit again,' said Francis Lun, general manager of Fulbright Securities
in Hong Kong.
'The biggest worry I have is whether this will trigger a repricing in the overall emerging
market,' said Arthur Lau, a fund manager in Hong Kong with JF Asset Management.
'This an important reminder that the credit crisis is forgotten but not gone,' Robert Rennie,
strategist at Westpac Global Markets Group, said in a note.
Asian banks, like their European peers, scrambled to distance themselves from Dubai, a
desert emirate that emerged from dusty obscurity to invest in global lenders such as Standard
Chartered and lure fund managers with the promise of a tax-free lifestyle.
Bursting the bubble: The launch of Atlantis hotel (above), on one of the palm islands (below)
last November was an extravagant celebration of Dubai's ambitions

The nerves showed in credit markets, at the centre of the financial storm triggered by the
Lehman Brothers' bankruptcy last year.
Asian credit default swaps, used to insure against default, were at their widest in a month,
with the Asia ex-Japan iTraxx investment-grade index touching 124/129 basis points.
Dubai's credit default swaps were being quoted as high as 500-550 basis points, some traders
said on Thursday.
Dubai's debt problems are a hangover from a property bubble that imploded after the
financial crisis derailed its plans to become a magnet for tourists and a regional hub for
everything from shipping to entertainment.
Banks' exposure to a Dubai default pales in comparison to the $2.8 trillion in writedowns the
International Monetary Fund estimates U.S. and European lenders will have to make between
2007 and 2010 as a result of the credit crisis.
'Similar stories to the one in Dubai are likely to come out, leading risk money to pull out from
assets such as commodities and stocks,' said Takahiko Murai, general manager of equities at
Nozomi Securities in Japan.
Japan's biggest bank Mitsubishi UFJ Financial Group fell as Japan's Nikkei average struck a
four-month closing low. It also came under pressure from weak exporters after the dollar hit a
fresh 14-year low against the yen. The Australian and New Zealand dollars retreated.
Shares in HSBC Holdings, one of the bookrunners on an outstanding $5.5 billion Dubai
World loan, dropped more than 7 per cent and Standard Chartered losses topped 6 per cent.
The London listed shares of the two lenders led the biggest tumble in European bank stocks
in six months on Thursday.

Iconic: Dubai's seven star sail-shaped hotel, the Burj Al Arab, was one of the first prestigious
projects to give the emirate an international profile

Read more: http://www.dailymail.co.uk/news/article-1231320/Dubai-debt-crisis-Fears-

second-economic-crash-global-stock-markets-tumble.html#ixzz0Z5JVQsMG
Dubai: what went wrong Tuesday, December 08, 2009
Dr Ashfaque H Khan

Dubai World, the flagship holding company of Dubai, with $100 billion in assets and $59
billion in debt, sought a six-month standstill agreement from its creditors on November 25,
2009. Bonds amounting to $4 billion and belonging to Nakheel – the property unit of Dubai
World - were maturing on December 14, 2009. The standstill agreement means that Dubai
World will negotiate with creditors to extend maturities.

It was indeed a shocking development. Stock markets around the world convulsed as
investors scrambled to understand the implications of the restructuring of debt. Only two
hours before Dubai revealed that it was seeking a standstill arrangement for Dubai World, it
had completed a transaction of $5 billion fully subscribed by Abu Dhabi through its two
state-controlled banks. Dubai has shattered the confidence and lost its credibility in the eyes
of global bond investors. The question now will be about the nature of the sovereign support
provided to various borrowers in the region. The cost of protecting Dubai’s paper against
default has quadrupled – putting the Emirates in the same league as Iceland.

What went wrong? Was the announcement sudden? Will Abu Dhabi bail Dubai out? What is
the nature and extent of Dubai’s debt burden? What are the future prospects of Dubai? How
can this crisis affect Asian economies in general and Pakistan in particular? These are
important questions and an attempt has been made to answer them.

Dubai witnessed an uninterrupted explosive growth over the last several years at the back of
easily available cheap credit. Such an impressive growth not only created excess capacity but
also bred over-confidence. The absence of oil wealth encouraged Dubai to diversify its
economy by developing trade, tourism, transport and real estate. Also, a series of free zones
dedicated to different sectors of the economy succeeded in attracting world-class companies
and as such Dubai had positioned itself as the financial and economic hub of the Middle East.
When the going was good, Dubai never looked back and continued to over-leverage itself,
thus accumulating a debt of over $80 billion or 100 per cent of the GDP. In plain language,
Dubai was carried away by its own success.

Last year’s global economic meltdown halted the pace of economic activity in Dubai. The
non-oil sectors that Dubai developed over the years were hit hard by the global economic
crisis. The value of the assets within and outside the Emirates dropped sharply and incomes
from tourism, hotel and airline continued to decline, thus creating cash flow problems. The
rise of sunk investment eroded Dubai’s debt-carrying capacity.

The chapter on Dubai’s financial crisis was already written some five months ago. The
Economist, in its July 11 issue this year, published an excellent article under titled “Trouble
in the United Arab Emirates” warning about the brewing financial crisis in Dubai by the year
end. What an accurate forecast it was. The Economist, quoting Standard & Poor’s (S&P),
stated that the risk to Dubai economy has increased substantially and that the uncertainty
regarding the government’s willingness to provide support to Nakheel was rising as well.

The fact that Dubai will be facing a serious debt crisis was known to the market as well as to
the authorities. It is in this perspective that in February 2009, Dubai wanted to raise $20
billion in a phased manner to honour its debt obligations. In February this year, the UAE
Central Bank bought a $10 billion bond out of the proposed $20 billion transaction. On
November 25, two Abu Dhabi state-owned banks bought another $5 billion bond, leaving $5
billion to be issued later.

Dubai’s debt payment obligations reached an unsustainable level. Some $13-17 billion is said
to be due in 2010 with almost $5 billion due in the first quarter. The S&P has estimated that
up to $50 billion worth of debt will have to be repaid by 2012. Realising the unsustainable
debt payment obligations, Dubai took a decisive action to address its debt problem without
apparently taking Abu Dhabi into confidence.

Dubai is wounded and its reputation is badly damaged. It will now be more dependent on
Abu Dhabi for a bail-out. It goes without saying that the economies of Abu Dhabi and Dubai
are too enmeshed to allow one part to fail. Abu Dhabi will certainly bail Dubai out of the
crisis. However, there would be no blank cheque for Dubai. Abu Dhabi will not like
profligacy of Dubai to continue on the back of its financial resources but at the same time it
will bail out Dubai on a case-to-case basis to avoid a serious long-term negative impact.
Dubai, for its part, will not be able to make economic or political decisions that Abu Dhabi
finds disagreeable. The latter would also like to demand a stake in some of Dubai’s healthy
assets in exchange for financial support. Furthermore, Abu Dhabi would push Dubai to adopt
a more conservative development model.

Dubai’s crisis can be contained and will not upset the world economic recovery. Sufficient
financial resources and willingness exist in this region to contain the fire. Asian economies in
general and Pakistan’s economy in particular are not expected to experience a significant
negative effect as the exposure of their banks in UAE are very limited and should not be a
source of concern. As far as workers’ remittances are concerned, its rate of increase is
expected to moderate in the short-to-medium term because Dubai’s economy is also expected
to grow moderately.

It takes years to build the confidence of the global investors but it takes just one moment to
shatter them. This is what Dubai did last year. Much will now depend on the way Dubai’s
authorities unruffle foreign investors’ fears