The Dow Jones Industrial Average dropped on Friday by 154.48 points or 1.48% down on Wednesday’s close (10,464.40) to 10,309.92 points, breaking a 3 week rally and finishing 0.1% down for the week. Wall Street closed Thursday for Thanksgiving, then reopened for a half day session in the midst of a global market selloff triggered by news that Dubai is seeking a debt moratorium. Dubai announced on Wednesday that its state flagship conglomerate, Dubai World, wanted a 6 month standstill on quoted 60-80 billion dollars of debt, sending markets into a panic over fears of a debt default.
“Dubai World, the de facto sovereign fund for the desert nation, has essentially defaulted on a large part of its debt,” said Douglas McIntyre of 24/7 WallSt.com.
The announcement “is sparking concerns about the financial health of the emerging markets and the impact on developed nations’ exposure to the debt of Dubai, which surged as the region has gone through a massive construction boom in the past few years,” Charles Schwab & Co. analysts said in a client note.
Details have not been released on how Dubai plans to pay off its debt, and Gulf stock markets will fall sharply on opening next week, analysts predict.
“It’s a very serious and severe problem that is likely to shake up the Gulf financial system as a whole. I expect Gulf bourses to dive like the September crash last year” following Lehman Brothers’ bankruptcy, warned Saudi economist Abdulwahab Abu-Dahesh.
Dubai’s government chose to announce the debt moratorium request immediately before a 4 day break for the Muslim holiday of Eid al-Adha, giving regional stock exchanges no chance to react.
The Financial Times said on Saturday: “Dubai must sort this mess out. It will not now be able to restore confidence in its solvency without support from Abu Dhabi. For its part, Abu Dhabi should give whatever help is needed to bring this episode of incompetence to a close. Abu Dhabi allowed it to be believed that it was backstopping Dubai, so it should make good its promises. This will require a public guarantee of Dubai?s debts – and soon. The reputation of the whole UAE depends upon it.”
The Dubai market’s DFM Index closed on Wednesday at 2,070.89, up more than 40% this year, but still down by two-thirds from its peak of 6,253.10 two years ago. Rules stipulate that it cannot fall by more than 10% in one day.
Monday will be a crucial day for world markets, and may set the tone for the coming days. Bank stocks are taking the news badly, as they try to figure out how much exposure they have to this outstanding debt. Well, something had to trigger it off, usually some disaster tends to set markets tumbling, which occurs more readily when they’re overvalued anyway. It all seems to fit the previous articles written here, regarding the imminent top, or Major High for 2009 of the Dow Jones Index – see article:
DOW JONES Major High November 2009.