Dubai debt scare sparks fears
Nov 26 2009 20:50
Paris - The spectre of default by the once-flourishing Gulf emirate Dubai has revived fears for the fate of other debt-ridden countries left reeling by the worldwide recession.
Dubai jolted stock markets with an announcement Wednesday it was seeking a six-month suspension on debts held by the state holding conglomerate Dubai World, owners of the emirate's biggest property developer Nakheel.
Leading European exchanges plunged more than 3.0 percent on Thursday, with investors dreading the prospect that recession-strapped governments elsewhere could be forced to take similar steps.
Share prices earlier ended sharply lower in Asia on a day on which Wall Street was closed for a holiday.
The rand fell more than 2 percent against the dollar on Thursday, reversing the previous day's strong gains as the greenback recovered broadly, helped by a downturn in appetite for risky assets.
The local bourse in Johannesburg also ended lower, with the debt problems in Dubai boosting the dollar and hitting the rand.
The Johannesburg Top-40 index lost 1.74 percent to 24 477.11 points, while the broader all-Share index shed 1.69 percent to 27 025.61 points.
By 17:40 the rand traded 2.11 percent weaker at 7.4925 against the greenback after ending Wednesday's session at 7.3375. It fell to 7.5075 earlier on Thursday, its weakest level in two days.
Big debts
Fighting to keep their financial institutions solvent in the worldwide economic downturn, governments around the world have borrowed heavily on world markets.
The rating agency Moody's estimates that global public debt will have risen by 45 percent from 2007 to 2010.
Under such circumstances, nervous financial markets could lose their appetite for bonds issued by certain countries, threatening the ability of governments to raise fresh cash.
"The problems arise when markets lose confidence in the capacity of a state to pay off its debt," said Juan Carlos Rodado, an economist with French bank Natixis.
Eastern Europe is currently the source of the greatest unease. After the fall of the Soviet Union, foreign capital flooded in - only to be withdrawn as the recent crisis deepened, leaving national economies in the region exposed and vulnerable.
The countries "most at risk," Rodado said, are the Baltic nations, Romania and Ukraine.
To attract investors, countries in such a situation are forced to raise the interest rates offered to creditors, thereby "deepening the cost of the debt," said Guy Longueville, an analyst with French bank BNP Paribas.
Facing bankruptcy, governments in the past have turned for financial help to the International Monetary Fund, which during the crisis has had its resources boosted.
"But now that the worst of the crisis is over, the IMF could change its policies," warned Agnes Benassy-Quere of the think tank Cepii.
Developed countries add to tension
The fund has already postponed the allocation of a portion of a loan it made to Romania, citing political instability there. The IMF took similar action against Ukraine on grounds that Kiev had failed to implement the budgetary rigour the Fund called for.
Developed countries too have added to the tension. Once a thriving financial center, Iceland suffered mightily in the crisis and had to turn to the IMF to escape bankruptcy.
Nor has the eurozone been spared. Standard and Poor's several months ago lowered its rating on Spain and Ireland, citing the size of their public deficits.
In Greece, according to the Organisation for Economic Cooperation and Development, the economy is expected to continue contracting in 2010, with its debt surging to 111.8 percent of output.
Isabelle Job at Credit Agricole agreed that while solvency concerns exist in Europe, "the risk of a developed country going bankrupt is extremely weak, notably in the eurozone."
"It's hard to see the (European Union executive) commission refusing to come to the aid of a member state."
- AFP
