US Banks Can Exhale Over Dubai Debt Problems-For Now
By Matthias Rieker, Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- For now, U.S. banks seem to have dodged a bullet; the
direct exposure to Dubai's debt appears to be far less than what European banks
might be on the hook for.
There could be worrisome issues lingering, however. Market confidence world-
wide is surely still fragile from the severity of the financial crisis, it is
unclear how counterparty risk will even out, and investment banking revenue
might take a hit.
Following a bloody day on European markets Wednesday, the relative calmness of
the New York stock market suggests that investors here are not overly concerned
about the Arab state's problems in paying at least part of its debt.
Shares of Citigroup Inc. (C) fell more than 5% in pre-market trading, but the
losses after market open were less severe, most recently the stock was down 2.5%
. JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) lost 1.5% and 2.3%,
respectively.
After much blame from all over the world was aimed at the U.S. government,
regulators, and banks for letting mortgage loans to shaky borrowers cause risk
to the world's financial system, perhaps Dubai's surprise request to delay of
some of its debt payments is a wake-up call to remind investors of Europe's own
exposure to risky markets, and to the fact that, as U.S. bankers privately note,
the leverage of at least some of Europe's banks is considerable bigger than that
of U.S. banks.
But it is too early to flash "all clear" signs. The risk might not be bonds or
loans held on banks' balance sheets. "The markets are still not digesting this
corporate debt crisis very well," Bank of America Merrill Lynch's emerging
markets research team said in a report. "There is indeed evidence of clear
contagion effects with basically all risky assets."
The amount of debt that will mature and needs to be refinanced immediately is
low, and subsequently the exposure of U.S. banks is miniscule. Of the $60
billion Dubai World, the state-owned company, has outstanding, less than $10
billion mature by the end of the first quarter.
But Dubai's overall debt "might be higher than the generally assumed $80
billion to $90 billion, due to potential off-balance sheet liabilities," UBS
analyst Saud Masud wrote in a research note.
Disclosure is scarce about who holds debt and chunks of syndicated loans.
And more risk might linger elsewhere. When Lehman Brothers failed last year,
General Electric Co. (GE), a company with triple-A rated bonds, was unable to
roll over its short-term debt.
"One cannot rule out--as a tail risk--a case where this would escalate into a
major sovereign default problem, which would then resonate across global
emerging markets in the same way that Argentina did in the early 2000s or Russia
in the late 1990s," Bank of America wrote. Argentinia in particular will evoke
bad memories with executives at Bank of America and other U.S. banks, and
emerging markets have been a big focus of banks with international exposure,
such as Citi.
"What is clear to us is the spillover…is a concern for global banks,"
JPMorgan Securities's European equity research team wrote in a report to clients
Friday morning. That spillover could be in form of losses from defaulting loans
but also from lower investment banking revenue from emerging markets, the report
said.
For now, "the indirect impact" of Dubai's problems are "unknown" and "could be
sizable," research analyst Richard Bove of Rochdale Securities LLC wrote in a
note.
"Counterparty derivatives: It is unknown how much Dubai has guaranteed and how
much of the Dubai product that has been guaranteed is held by American banks,"
Bove write. "U.K. banks have loaned money to Dubai. Since American banks are
involved with U.K. banks there is an indirect risk here."
In short: "The Dubai default will cause near-term issues in the financial
system. There will be indirect losses to the American banking system. Regulation
will be notched higher and the U.S. may look more attractive to holders of funds
than it has for some time," Bove wrote.
-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; matthias.rieker@
dowjones.com
(END) Dow Jones Newswires
11-27-091333ET
Copyright (c) 2009 Dow Jones & Company, Inc.
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