Friday, January 21, 2011

Concerns Over Dubai World Result in Increase of Debt Insurance Costs

Dubai World, Emirate's flag bearer in global investments, is undergoing a $22 billion debt restructuring. This has provoked a lot of speculations and an air of uncertainty has started to settle over the financial market. As a consequence, bond yields as well the debt insurance cost of Dubai World has started to shoot up. This looks particularly striking when you think of the recent billion dollar bailout of Dubai by Abu Dhabi.

The finance world was virtually speechless when this investing giant declared in November that it is going for a debt payment standstill. Dubai World can proceed with debt payments owing to the extremely expensive bailout by Abu Dhabi. However, no official agreement regarding payment standstill has been reached.

There has been a surprisingly sharp increase of five year credit default swaps (CDS) for Dubai recently. They are right now quoted at 510 bps. Do you understand the implications? It would cost more than .5 million to insure $10 million of the emirate's debt for five years.

The sources at ING investment management say that the announcement from Dubai World was absolutely unexpected and they did not have a clue about it. Sources confirm that ING did not receive any proposal from Dubai World. The whole issue is quite obscure right now.

The CDs are about to reach a level which was witnessed in the eve of the bailout. This has triggered the shooting up of debt insurance costs for Abu Dhabi and Bahrain as well. However, the rise in debt insurance has been relatively small for them. Financial experts opine that Standard and poor’s decision to revoke its rating for Dubai Holding Commercial Group has made quite an impact in this part of the world. Clearly, the apprehensions about Dubai World are affecting other companies like Dubai Holding.

It is significant that the rise in debt insurance costs came at a time when Greece is knee deep in debt and other countries in the euro zone are facing debt crisis as well (In fact debt management is quite an issue in euro zone right now). There is no question of an emergency situation right now but people are naturally skeptical since there is a possibility of debt rescheduling.

The $10 million, thanks to Abu Dhabi, will help Dubai World to refinance for 2010 as well as 2011. Moreover, its sister concern Nakheel has a domestic bond which is supposed to mature soon. Experts predict a $ 1,0 billion in net international bond insurance in this part of the world in the current year.

Author Bio:
This is a guest post by Kevin Craig who is a financial writer for various finance related Communities. He has been providing advice on debt relief since 2007.He has helped many indebted people to get out of debt by giving them proper financial advice for debt management. With his advice many are now living a debt free life. You can get in touch with him at

1 comment:

  1. Hello Guest Blogger,

    I just would like to share that the quality of this post is similar to what I've read from Economist or Wall Streeet Journal.

    Not sure wherher you are a journalist. But do keep posting! I don't see many bloggers post on topics concerning sovereign debts. It may be the catalyst for the next "financial crises".

    Good to be able to "stay tuned". Thanks for the heads-up!


Popular Posts