Tuesday, December 1, 2009

A Quick Note On Dubai

Last week everyone was a-flutter about Dubai. It was the signal of another round of massive debt problems; we were all going to hell.

Except this overlooked a few basic points. First -- the total debt involved was $80 billion. That's tiny. Then there is the issue of what was really going on -- a renegotiation of real estate debt. In essence, a borrower was saying "I want to renegotiate the terms of my loan."

How do I know this?

Dubai World began talks with banks to restructure $26 billion of debt, including $3.5 billion owed by property unit Nakheel, and said the remainder of its liabilities are on “a stable financial footing.”

Debt from subsidiaries including Infinity World Holding, Istithmar World and Ports & Free Zone World will be excluded from the negotiations, Dubai World, one of the emirate’s three main state-related holding companies, said in a statement. The cost to protect Dubai debt against default fell to the lowest since Nov. 25. Dubai’s main equity index dropped 6.6 percent.

Dubai is seeking to delay payments on less than half its $59 billion of liabilities, easing the potential damage to banks recovering from $1.7 trillion of losses and writedowns from the global crisis. Shares worldwide recovered some of the losses suffered since Dubai announced it would seek a “standstill” agreement on all of Dubai World’s debt as the Dow Jones Euro Stoxx 600 gained 1.2 percent and the MSCI Emerging Markets Index showed the first back-to-back gains in two weeks.

For anyone that's been around the markets for longer than a day, the real reason for this situation should not have been surprising. In fact, it happens all the time especially in this environment. Borrowers ask banks to rethink the terms of a loan. And they usually start by saying, "I can't pay this." Duh.