No Thanksgiving for investors: Dubai's debt woes rattle stocks around the globe
Thursday is one of those days when I wish I could be reincarnated as Jon Stewart. I am certainly hoping that when he returns to live broadcasts, he can find the funny in the media's obsessive coverage of the State Dinner crashers. And if he does this, he should note that while the media salivated over the Salahis, it ignored a far more important story -- Middle Eastern petro-state, Dubai, was defaulting on its debt.
Problems with Dubai's finances are not a big surprise. As I posted in February, I first got wind of the potential for a huge collapse there back in 2005 when I read an article in the New Yorker which discussed Dubai's world record breaking pace of commercial real estate development as its government sought to diversify away from oil.
And Dubai is perhaps just one extreme example of a bigger problem. As I've posted, the $6.7 trillion commercial real estate lending industry has been dangling out there as the potential cause of a double dip economic contraction. But I did not anticipate that Dubai's inability to repay its debts would be the straw that would break the back of commercial real estate.
How so? The New York Times reports that a subsidiary of Dubai World -- the corporate arm of a country that will pay Rihanna $500,000 to sing at a New Years Eve party at the Emirates Palace Hotel in Abu Dhabi -- has asked its creditors for a break.
Specifically, Nakheel, the developer of palm-shape islands owned by Dubai World, wants its creditors to accept a six month delay in a $3.52 billion repayment on its Islamic bonds due December 14th. (Dubai World's liabilities total $59 billion).
The rest of the financial world is not thrilled with Dubai -- whose debt totals $80 billion. DealBook reports that the cost of insuring Dubai government debt against default using five-year credit default swaps spiked up 32% from 318 Tuesday to 420.6 Wednesday. And Nakheel's Islamic bond prices fell over 20 points to 87.
And in a move reminiscent of last fall's global financial collapse, world markets fell sharply on fears of contagion from rising nervousness -- possibly by lenders to commercial real estate projects in similarly dire financial straits. Britain's FTSE 100 was down 1.9%; Germany's DAX fell 2%; France's CAC-40 declined 2.2%; the Shanghai index tanked 3.6%; and Hong Kong's Hang Seng lost 1.8%, according to The Associated Press.
Simply put, it looks like Dubai is making the world look like bigger turkeys this Thanksgiving than the Salahis did to White House security. Meanwhile, I'd advise Rihanna to get paid up-front.