Dubai debt scare drags global stocks and Indian equities
Even as the Union Government put up a brave front over the Dubai debt crisis saying it will have little impact on the Indian economy, the crisis did put the domestic stock markets in tatters initially on Friday but recovered much of the lost ground in the last trading hour, thanks to insurance companies doing the bulk of buying.
Global stocks across started sinking since Thursday, the moment when Dubai government announced that two of its flagship firms Dubai World (an investment company) and Nakheel (a construction company) planned to dealy repayment of billions of dollars in debt.
The markets within and outside the country feared the worst that this debt default could affect other countries as they are still in the process of recovery from global meltdown.
Dubai Government announced on Thursday that it would ask creditors of both Dubai World and Nakheel to agree a standstill on billions of dollars of debt as an initial step towards restructuring. Dubai World has estimated debt of $59 billion, which is representing a large part of Dubai’s total debt of $80 billion. On Friday key benchmark index BSE Sensex dropped 223 points to close at 16,632 and the NSE Nifty lost 64 points to close at 4942. Of course, in the early part of the day both indices lost much more but recovered to some extent in the last one hour.
The Dubai debt crisis has also badly hit other major Asian markets earlier during the day. Japan’s Nekkei lost 302 (3.22 per cent) points, China’s Shanghai index dropped 75 points (2.36 per cent) and Hong Kong’s Hang Seng lost a whopping 1075 ponts (4.84 per cent).
In early trading in the US, the Dow Jones industrial average was down 1.9 percent or 210 points.
The broader Standard & Poor’s 500-stock index fell 2.3 percent or 26 points, and the technology-dominated Nasdaq slipped 2.4 percent or 53 points. A recovery in European stocks from an initial slide and news that China has pledged to stick with a pro-growth stance in 2010, aided the recovery.
A research note Friday from Credit Suisse said that European banks may be hit hardest if Dubai World cannot meet its obligations. The Swiss bank estimated that European banks could have a total exposure of 13 billion euros or $19.6 billion.
Fear of instability
Dubai’s move sowed fear of a contagion of instability that could roil markets that are only now recovering from the near cataclysm of the last year.
“This has sent shockwaves through the markets, even though the problems in Dubai have been known about for two years,” Emil Wolter, a Hong Kong-based strategist the Royal Bank of Scotland, said from Paris. “But it is not the trigger for a brand-new crisis. Yes, the magnitude of the situation is dramatic for Dubai. But Dubai is not America — and a property crisis in Dubai will not cause the same global crisis as a property crisis in the States.”
Some market experts noted, for instance, that while banks that have lent money to Dubai World could suffer significant losses if the company were to default on all or part of its debt, worries about the sovereign debt of oil-rich Middle Eastern countries were unfounded.
