With some research firms predicting more than a 1 in 3 chance that the UAE will default on $60 billion in debt payments, fears that Dubai World’s debt problems could affect the US banking industry have increased. Although much of the exposure is indirect, if Dubai has to divest its commercial real estate investments at distressed prices, experts believe that this could drive commercial real estate prices further down — creating a negative impact on US banks. For more on this, see the following article from Money Morning.
A potential default by Dubai on debt payments could have a ripple effect on U.S. banks and the still-gloomy commercial real estate industry, some analysts say.
Citigroup Inc. (NYSE: C) has $1.9 billion invested in the nation’s state-owned investment vehicle Dubai World, JPMorgan Chase & Co. (NYSE: JPM) said in a research note.
While not directly affecting Citi or other major U.S. banks, the indirect effects could be more crippling on a broader scale, Rochdale Securities analyst Dick Bove told CNNMoney.
“There could be huge indirect exposure,” Bove said. “One has to assume that U.S. banks will be hurt.”
Citi, JPMorgan and other major banks didn’t comment on the potential consequences of a Dubai default. However, Morgan Stanley (NYSE: MS) said a default “would have no material impact on its earnings.”
But according to Bove, such extravagant projects as palm-shaped peninsulas, large skyscrapers and plans to build the world’s largest airport, could have a decidedly negative impact on the already battered commercial real estate market.
“Dubai may have to unload some very prestigious properties at distressed prices, and this will drive the price of all commercial real estate lower,” said Bove. “That would clearly be a problem for American banks.”
Also, little information about counterparty derivatives and guarantees that transfer default risk from lenders to other financial institutions has been made available, which means a greater degree of uncertainty for U.S. banks.
Furthermore, no one outside of the banks themselves knows exactly how much of Dubai World’s debt guarantee is held by U.S. institutions. Banks in the United Kingdom, which according to JPMorgan have roughly $30 billion in Dubai World default risk, have extensive dealings such as trading and debt guarantees with American banks. U.S. banks could be exposed to risk based on their dealings with their German counterparts as well.
Credit market research firm CMA DataVision says there’s a 35.82% chance that the United Arab Emirate (UAE) nation will actually default on the almost $60 billion in debt payments it delayed.
This article has been republished from Money Morning. You can also view this article at Money Morning, an investment news and analysis site.