Archive for November, 2009

UK’s Brown to push bank bailout plan at summit (Reuters)

Thursday, November 26th, 2009 | Finance News

LONDON (Reuters) –
Prime Minister Gordon Brown said he would lobby for support for his plan to make banks pay for any future bailout at a Commonwealth summit this week.

He also wants Commonwealth leaders meeting in Trinidad and Tobago from Friday to give a push to climate change negotiations and to send a signal that Zimbabwe could be re-admitted to the 53-nation organization if it goes through with reforms.

Brown, whose government spent billions bailing out British banks, pressed the Group of 20 major economies this month to come up with a plan to make banks pay for any future rescues.

One option Brown mentioned, a global financial transactions tax, was immediately shot down by the United States.

Brown indicated he was not discouraged by the initially cool reception given to his proposal and would continue to push it at the Commonwealth meeting, which includes big economies such as Australia, Canada, India, New Zealand and South Africa.

"You've got to look at this at a global level. I will be raising this with my Commonwealth partners," he said in a pre-summit briefing for reporters on Wednesday. Brown's office asked that his remarks not be published until Friday.

"You can look at an insurance scheme. You can look at the creation of resolution funds. You can look at asking banks to hold contingent capital. Or you can look at a transactions or a global levy of some sort," he said.

"I think I will find a great deal of support from a large number of countries around the world ... I think ... there will be gradually more support for the proposals I am putting forward," he said.


Brown also wants the Commonwealth to dangle the carrot of re-admission before Zimbabwe to encourage reform there.

Zimbabwe withdrew from the Commonwealth in 2003 after the group of mainly former British colonies renewed a suspension imposed on the country in 2002 when President Robert Mugabe won re-election in a poll some observers said was rigged.

Mugabe and opposition leader Morgan Tsvangirai have now formed an uneasy partnership in a unity government.

Brown said the unity government had achieved changes but Britain remained concerned about the pace of progress.

"There is still a great deal to do on judicial reform, on constitutional reform, on human rights and economic reform and we are clearly not yet at a stage for Zimbabwe to rejoin the Commonwealth," he said.

"I believe however that the best way forward is to hold out a conditional offer that it is possible for Zimbabwe to rejoin the Commonwealth if Zimbabwe takes the necessary steps and delivers on the requirements of the Global Political Agreement," he said, referring to Zimbabwe's power-sharing deal.

Brown said the summit, which brings together leaders of both wealthy and poor nations, could be a springboard to successful U.N. climate change talks in Copenhagen on December 7-18.

Brown said progress was being made in discussions on how to pay for countering climate change, including helping poor countries to adapt.

"If we can find a solution to the financial questions then obviously it will be easier for countries to announce what they are prepared to do to cut carbon emissions," he said.

(Editing by Andrew Roche)


Dubai defends debt payment suspension as markets fall (AFP)

Thursday, November 26th, 2009 | Finance News

A senior Dubai official defended on Thursday his government's proposal to suspend debt payments by its Dubai World conglomerate, as global stock markets fell amid fears of widespread default.

The suspension of payments on Dubai World was "carefully planned" and done in full knowledge of how the markets would react, a senior official said on Thursday.

"Our intervention in Dubai World was carefully planned and reflects its specific financial position," Sheikh Ahmed bin Saeed al-Maktoum, chairman of the Supreme Fiscal Committee, said in a statement.

He added that "further information will be made available early next week."

"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."

Ratings agency Standard and Poor's described the debt moratorium as a default.

European stock markets dropped sharply on the news, with European exchanges particularly hard hit. Paris and Milan each plunged by more than three percent in afternoon trading on Thursday. US markets were closed for the Thanksgiving holiday.

Dubai has seen a surge in extravagant building projects, with vast skyscrapers springing up in the desert state, but it has suffered in the global financial crisis.

Most of its debt is held by state-backed companies.

Dubai World, which reportedly has 59 billion dollars in liabilities, owns a range of businesses including international ports operator DP World and giant property developer Nakheel.

Until recently the jewel in the crown of Dubai's construction boom, Nakheel was due to pay off about 3.5 billion dollars in maturing Islamic bonds in December.

Sheikh Ahmed insisted that "unprecedented growth, in Dubai and across the (United Arab Emirates), over the past decade has helped lay the foundation for what is now a broad-based sustainable economy beyond just natural resources."

"Like most global cities, Dubai has experienced its share of economic and social challenges in this global downturn,' Sheikh Ahmed said. "No market is immune from economic issues. This is a sensible business decision."

But he said "economic fundamentals, such as our highly developed infrastructure, strong transport and communications hub and regional financial centre will ensure Dubai remains an attractive regional market."

Dubai's move triggered fears of a domino effect across the emirate's indebted state-run corporates, pushing debt rating agencies to slash the grading of Dubai companies.

The fear of Dubai's default "fed a climate of insecurity and crisis of confidence at a time when fears are mounting about excessive public debt," said Xavier de Villepion, an analyst with Global Equities.

Moody's rating agency said it downgraded six government-related companies, including Dubai World entities, while Standard and Poors downgraded the ratings of five of those companies.

"In our view, such a restructuring may be considered a default under our default criteria, and represents the failure of the Dubai government (not rated) to provide timely financial support to a core government-related entity," S and P said.

Fitch Ratings agency downgraded two of Dubai's top public firms on Thursday, lowering its Issuer Default Ratings for Dubai Holding Commercial Operations Group LLC (DHCOG) and the Dubai Electricity and Water Authority (DEWA) from 'A-' to 'BBB-', with Rating Watch Negative and Outlook Negative respectively.

"The above corporate entities have strong operational and strategic ties with the Dubai government and the downgrades reflect Fitch's re-assessment of the ability of the Dubai government to support them," the agency said.

While the announcement was made after the closing of Dubai's stock market for a long Eid holiday, the value of Nakheel's 2009 bonds dropped by 27 percent, according to EFG-Hermes regional investment bank.

Dubai's total debt reached 80 billion dollars last year, of which government companies owed some 70 billion dollars.

The announcement came on the heels of another, that Dubai had secured a further five billion dollars through a new bond issue, fully subscribed by two banks controlled by the government of Abu Dhabi.

The new bonds demonstrate that Abu Dhabi, the oil-rich partner in the UAE, is still ready to help Dubai, but the extent of that support remains unknown.


Dubai struggles to ease debt default fears (Reuters)

Thursday, November 26th, 2009 | Finance News

DUBAI/LONDON (Reuters) –
Dubai struggled to ease fears of debt default on Thursday after its move to delay repayments at two flagship firms shook confidence in the Middle East as a center for investment and a source of capital.

Dubai's debt problems, a hangover from a property boom that produced the world's tallest building, have shaken trust among Western investors who turned to the oil-exporting Gulf region for help during the global financial crisis.

The emirate shook the financial world on Wednesday when it said it would ask creditors of Dubai World, the conglomerate behind its rapid expansion, and Nakheel, builder of its palm-shaped islands, to agree to a standstill on billions of dollars of debt as a first step toward restructuring.

State-run Dubai World had $59 billion of liabilities as of August, a large proportion of Dubai's total debt of $80 billion.

Dubai tried to revive confidence by saying on Thursday its profitable DP World, which runs 49 ports around the world, would not be involved in the restructuring. DP World, which has $3.25 billion outstanding bonds, is majority owned by Dubai World but has shares listed on NASDAQDubai.

"It might be a move to distinguish the solvent from less solvent companies in an attempt to shift the weight away from the less exposed entities," said John Sfakianakis, chief economist at Saudi Fransi bank.

But European bank shares, which had recovered in recent months on hopes that the worst of a global crisis was over, fell to lows not seen since May.

There was no immediate sign that U.S. banks were exposed, although checks were difficult to make given Thursday's Thanksgiving holiday.

The Dubai news sent a fresh shudder through emerging markets. Stock markets around the world sank, with weakness extending to Latin America, where the Mexican peso was knocked off a 1-year high and Brazilian assets sank.

"If this eventually becomes an issue that affects the banks, once again it will put in doubt their capacity to start lending, which is a key factor in all the strategies to reactivate economies," said Carlos Ponce, head of equity strategy at brokerage IXE in Mexico City.

The U.S. dollar edged up from 14-year lows against the yen as renewed risk aversion prompted investors to shed riskier assets.

"Spreads on a lot of fixed income products have gotten to very rich levels and the Dubai default will force risk to get repriced downward" when U.S. markets reopen on Friday, said Andrew Brenner, at Guggenheim Securities. "Either way, look for a flight to quality scenario tomorrow on a holiday-shortened day."

Exposure to Dubai World could be as high as $12 billion in syndicated and bilateral loans, including existing loans for Nakheel and Istithmar, an investment arm of Dubai's government, banking sources told Thomson Reuters LPC.

A senior Dubai financial official said he understood markets' worries.

"However we have had to intervene because of the need to take decisive action to address (Dubai World's) particular debt burden," Sheikh Ahmed bin Saeed al-Maktoum, chairman of Dubai's Supreme Fiscal Committee, said in a statement.


In one of the first signs that Dubai's problems could hurt global fund-raising efforts for its neighbors, Saudi-backed Gulf International Bank pulled a bond sale due to price this week.

Dubai's move will likely lead to a reassessment of the riskiness of debt issued by the region's sovereign-linked firms.

Ratings agency Standard & Poor's said on Thursday it had placed the ratings of four Dubai-based banks on negative outlook due to their exposure to Dubai World.

S&P's and Moody's Investors Service had already severely downgraded several government-related entities on Wednesday.

Dubai World's announcement on Wednesday also sent the cost of insuring Dubai's debt against default soaring and bond prices tumbling.

Dubai World, whose slogan is "The sun never sets on Dubai World", has $59 billion of liabilities.

Dubai's credit default swaps are being quoted as high as 500-550 basis points, some traders said, while the cost of insuring Qatari, Abu Dhabi and Bahrain debt also surged.

Analysts downplayed the fallout for the wider region, however, pointing out that Dubai funded its growth through loans, whereas its neighbors are mostly major oil and gas exporters.

"I would not rush into talking about contagion. Anything from Abu Dhabi or Qatar is backed by serious money. Dubai is a lot more leveraged," said Youssef Affany, a relationship manager at Citi who specializes in the region.

"There will be some level of solidarity from the emirates and the big neighbor, Saudi."

Analysts expect financial support from Abu Dhabi, a neighboring member of the United Arab Emirates and home to most of the country's oil. But Dubai might have to abandon an economic model that focused on heavy real estate investment and inflows of foreign money and labor.


If creditors reject proposals to postpone near-term debt obligations until May 2010, the Dubai government could be forced to hold a firesale of its international real estate.

International property advisers braced for a potential slew of instructions to sell trophy assets owned by Dubai World.

"We do expect the Dubai government to step up efforts to raise capital via real estate sales, and sales of their UK assets in particular," said James Lewis, a member of the Gulf capital markets team at property consultant Knight Frank.

One fund manager said Dubai could not separate the debts of DP World from the Nakheel bond at the heart of Dubai's problems.

"Trust is the basis of all credit. It can take decades to build up credit-worthiness and moments to destroy it. They have the money to pay the Nakheel bond," said the fund manager.

"DP World can't be kept separate. If that's an asset of Dubai World, ownership of that can presumably be attached by Nakheel creditors."

(Writing by Alistair Bell, Additional reporting by Ulf Laessing in Saudi Arabia, Sebastian Tong, Steve Slater, Kristen Donovan, Natsuko Waki and Sujata Rao in London, Michael O'Boyle in Mexico City and Phil Wahba in New York; Editing by Dan Grebler)