World stock markets took a hit Thursday following Wednesday’s announcement by Dubai World, a major strategic developer, that it would suspend payments on its debt and the government would not pick up the tab.
International banking stocks fell sharply Thursday following concerns of their exposure to Dubai. Reuters reported that Dubai five-year credit default swaps have been quoted as high as 500-550 basis points, costing nearly $500,000 annually to insure $10 million of Dubai’s debt. Only two days ago, they cost about $360,000.
Islamic bonds across Asian markets also felt the shock from the decision. There have been widespread selloffs in Asian sukuk, or Islamic bonds.
Confidence in Dubai’s financial management has no doubt taken a heavy blow. Standard & Poor’s and Moody’s Investors Service downgraded the debt of several government-related firms in Dubai following Dubai World’s announcement.
“Dubai World intends to ask all providers of financing to Dubai World and Nakheel to a ‘standstill’ and extend maturities until at least 30 May 2010,” Dubai Financial Support Fund (DFSF) said in a statement on Thursday. During this time, it will restructure the company.
“In our view, such a restructuring may be considered a default under our default criteria, and represents the failure of the Dubai government to provide timely financial support to a core government-related entity,” Standard & Poor’s said. Next year, Dubai must repay around $13 to banks and bondholders. In 2011, the figure is expected to reach $19.5 billion.
