Stock markets across the globe suffered fresh falls on Friday as global investors scrambled to understand the implications of Dubai World’s restructuring and unexpected debt standstill.
The lack of information about Dubai’s flagship government-owned holding company, made worse by a religious holiday in the Middle East, prompted indiscriminate selling of stocks linked to the region. The cost of insuring against default in emerging markets around the world also leapt.
In Japan, the Nikkei 225 lost 3.2 per cent to close at 9,081.52, its biggest one-day decline in almost eight months. In Seoul, the Kospi fell 4.7 per cent to 1,524.50, a four-month low. Australia’s S&P/ASX 200 lost 2.9 per cent to 4,572.10, while Hong Kong’s Hang Seng dropped 4.8 per cent to 21,134..50.
The selling spread to Europe, where the FTSE 100 at one point slumped 1.8 per cent but regained ground to trade down 0.4 per cent at 5,175.3. The FTSE Eurofirst 300 fell 0.5 per cent to 983.2. US futures pared losses but still point to the S&P 500 opening down 2 per cent from the new high for the year it achieved ahead of Thursday’s Thanksgiving holiday, when US markets remained closed.
Audio: Simeon Kerr on investor reactions
‘People are in the dark .... There’s been something of an information vacuum out of the government on the events’
Investors said that the lack of information about the debt standstill, announced on Wednesday, had been the key factor sparking the wider market turmoil. Investors generally moved into safer assets, pushing up prices of traditional havens such as government bonds.
“In the absence of definitive information it’s hard to see the market treating this as an isolated one-off,” said one trader.
After markets in Europe closed Dubai issued a statement on Thursday defending its move as a “sensible business decision”.
Sheikh Ahmed bin Saeed al-Maktoum, chairman of the Supreme Fiscal Committee, said: “While the government understands the concerns of the market and the creditors, it had to intervene because of the need to take decisive action to address its particular debt burden.”
He said the government had acted in full knowledge of how markets would react. “We want to ensure resources are deployed ... to enhance the businesses of Dubai World Group, build on the restructuring ... and ensure long-term commercial success.” He said that further information would be given early next week.
A conference call on Thursday for bondholders of Nakheel, the Dubai-owned property company at the centre of the storm, collapsed after phone lines were swamped with callers.
Nakheel, wholly owned by Dubai World, is due to redeem a $3.5bn bond next month. The bonds were trading on Friday at 40 cents on the dollar, almost 70 below their 109 redemption price as investors lowered their expectations that payments would be made following Dubai World’s call for a six-month standstill.
The conference call was organised by QVT, a New York hedge fund. A fund executive confirmed that it was reorganising the call with a greater phone capacity but declined to comment further.
“People are panicking: This whole process counters everything that the rulers have been saying and the way it has been communicated before the holidays so no one can get any information is confusing,” said one hedge fund manager.
The cost of insuring Dubai’s debt against default jumped more than 100 basis points on Friday to 670, meaning that it now costs $670,000 annually for every $10m of debt covered for five years.
Other Gulf states and emerging markets with perceived problems were also under pressure. Hungary, which has had problems refinancing debt, and Greece, with one of the highest debt burdens in Europe, saw their insurance costs jump.
However, Gordon Brown, UK prime minister, said he and top regulator Mario Draghi were confident that the Dubai problem was containable and localised.
”I’ve talked to the chairman of the Financial Stability Board, Mario Draghi, in my capacity as president of the G20,” he said in Trinidad and Tobago, where he is attending a Commonwealth summit.
”I believe that we are satisfied that [with] the arrangements in place, the mechanisms that we’ve got in place to monitor what’s happening, we can be sure that this is something that is both containable and is localised.”
Additional reporting by Reuters
