Dubai World's surprise request for a freeze on debt payments hits bank stocks and the price of oil, but lifts the dollar.
Markets react to Dubai World debt plan
Dubai World's surprise request for a freeze on debt payments provided the focus for world financial markets yesterday, hitting bank stocks and the price of oil, but lifting the dollar on a day when US and most Gulf markets were closed. With the US on holiday for Thanksgiving, the region observing Eid al Adha, and trading on the London Stock Exchange temporarily closed for technical reasons, the environment was ripe for rumour and sensation as markets eschewed risk for gold and US dollars.
The day began with credit ratings agencies downgrading several government-related companies, such as DIFC Investments and Emaar, citing questions over Government support. Gold, a traditional refuge for investors in a storm, hit a record high of nearly US$1,200 before falling back. Dubai then issued a statement to the market clarifying that DP World, the profitable ports division of Dubai World, would be spared from a restructuring that was announced along with the debt freeze request.
The announcement regarding DP World was welcomed by markets and within the company itself. "This makes perfect sense. We have very tradable assets and a very attractive business," a DP World executive said, speaking on condition of anonymity. Still, markets added a premium to the cost of borrowing for Gulf companies, and the price of insuring government debt against default also rose. European stock markets had their biggest falls in three weeks, while the MSCI index of emerging stock markets declined by one per cent.
Worst hit were banks with exposure to Dubai such as Credit Suisse Group, HSBC Holdings, Barclays, Lloyds Banking Group and Royal Bank of Scotland. Credit Suisse fell 3.5 per cent in Zurich, HSBC slid 4.3 per cent, Lloyds sank 3.9 per cent and RBS retreated 4.2 per cent in London. Carmakers and aircraft manufacturers were also hit. European bonds rose as investors fled to the relative safety of government debt.