DUBAI - Abu Dhabi stepped in to help fellow United Arab Emirates member Dubai on Monday with a $10 billion injection, of which $4.1 billion was allocated to troubled state-owned conglomerate Dubai World to pay immediate obligations, Dubai said on Monday.
The bailout was the least expected of all options Dubai had on the table after requesting a standstill on $26 billion in Dubai World debt on November 25, alarming markets and shaking the image of the emirate as a regional business hub.
The U.S. dollar jumped against the yen on the news, while Asian stock markets rebounded.
JOHN SFAKIANAKIS, CHIEF ECONOMIST, BANQUE SAUDI FRANSI-CREDIT AGRICOLE, RIYADH:
This is kind of above and beyond what people expected. It is a crucial and essential lifeline ... it at a time when the markets really needed.
That should bring in a lot of confidence, basically Abu Dhabi is footing the bill.
It will take time for the implications to unfold. I highly doubt this kind of money has no strings attached.
There was no other choice for Abu Dhabi but to bailout Dubai, the federation would have been at stake.
But there are still debt issues still looming in 2010 and 2011.
DELPHINE ARRIGHI, SENIOR RATES STRATEGIST, STANDARD CHARTERED:
The Dubai sovereign spread should narrow significantly toward the Abu Dhabi one. All the names in the region should benefit from restored confidence.
The move will be quite dramatic, and should be accelerating the relatively tighter liquidity to year-end.
JUN KATO, SENIOR CHIEF ANALYST, SHINKIN CENTRAL BANK RESEARCH INSTITUTE, TOKYO
The announcement eased concerns about the Dubai debt troubles to some degree, but it will likely be temporary and the positive impact on stock and currency markets seems to be short-lived.
Players in the currency market took the announcement as an excuse to cover short positions in cross/yen. It is premature to say the Dubai debt problem is solved, and the yen's gradual appreciation is what the market is about now. ABHEEK BARUA,
CHIEF ECONOMIST, HDFC BANK, NEW DELHI:
This was sort of anticipated: if they had defaulted on this it would have led to a fairly major crisis. Right after the problem broke, the fiscal authority had indicated that at least this tranche would be sort of supported and bailed out by the government.
This will lead to some degree of stability at least temporarily. This is just the beginning, the tip of the iceberg. There is a lot more that needs to be done and we are getting to hear more and more entities with outstanding liabilities and it is not that easy to bail them out. So this comes as a relief, but more of them are anticipated.
The market was a little jittery about this so there could be a little bit of dollar reversal and a pick up in risky assets. I would see this as positive for the markets ... all non-dollar assets.
GLENN MAGUIRE, ASIA PAC CHIEF ECONOMIST, SOCIETE GENERALE:
Dubai was always a reminder of a lingering risk event. overleveraged to invest in real estate and significant decline in asset value was what subprime was all about.
What we have seen out of that is several institutions and sectors globally will have to deleverage. Indeed for many years to come, we will need to see governments and central banks will to step in to facilitate the deleveraging process. This is a reminder this deleveraging process will be a continuing dynamic in coming years. The pricing out of the Dubai risk event has largely been completed. I don't think this is going to make people more risk tolerant.
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:
This is good news as funding support from Abu Dhabi to Dubai World is quite substantial and would best serve the interest of all stake holders in the coming months. As for Bank of Baroda, there was no immediate concern as we did not have any exposure to Nakheel (but) this has certainly improved the risk-reward profile for all banks operating within Dubai. which is an important global financial center.
ASHRAF LAIDI, CHIEF MARKET STRATEGIST, CMC MARKETS, LONDON:
This is big news, triggering a very aggressive rally in risk appetite and equities. But markets are likely to remain skeptical...
Combining this positive Dubai news along with a likely 'no change' in the FOMC statement (this week) we could see a short-term retreat in the U.S. dollar, but I think markets are going to be remain tense.
The way to play this is this news is going to shore up European stocks at the open. We could see another wave of dollar selling in Europe. But I don't know how sustainable it is.
STEPHEN ROBERTS, ECONOMIST, NOMURA, SYDNEY
The Dubai World news takes away one uncertainty that had led to a U.S. dollar pullback. It has repercussions across the world and not just the Middle East. It has given a fresh impetus to investors to buy risk and when anything like that happens, it tends to support the Australian dollar.
JEONG MY-YOUNG, FX STRATEGIST, SAMSUNG FUTURES, SEOUL
U.S. stocks futures are rebounding and this is lifting Asian stocks and pressuring the dollar against the euro. These factors are prompting investors to reduce dollar positions in favor of emerging-market currencies like won.
FAHD IQBAL, GULF REGION STRATEGIST, EFG-HERMES:
It was one of the options that was outlined. There was a lot of uncertainty of what was going to happen, but we didn't put this as among the highest possibility.
We should see a positive reaction from the stock markets, there should be an initial rebound but the longer term outlook doesn't necessarily change things.
We still have other concerns with regard to other obligations, with regards to the hit in confidence that Dubai has taken.
-- the yen fell sharply against other major currencies after Dubai said it had received $10 billion from Abu Dhabi to help it repay $4.1 billion in an Islamic bond maturing on Monday.
- The dollar shot up to 88.90 yen after the statement from around 88.50 yen. The euro also jumped to 130.43 yen from around 129.40 yen.
- Credit default swap (CDS) spreads tightened slightly. The Asia ex-Japan iTraxx investment-grade index was 2-3 basis points (bps) tighter at 98/100. South Korea was slightly tighter at 88 bps and the Philippines 2 bps tighter at 165/175 bps. Dubai CDS quotes were not yet available in London markets.
(Reporting by Amran Abocar; Additional reporting by Reuters bureaus across Asia; Editing by Inal Ersan & Kim Coghill)