Stocks fall and government bonds rise on flight to quality
LONDON (MarketWatch) -- Fears of a potential sovereign default by Dubai roiled financial markets Thursday, sinking stocks in Asia and Europe and pushing up government-bond prices as investors sought safe havens.
Dubai late Wednesday said it would restructure Dubai World and announced a six-month "standstill" on repayments of the state-run wide-ranging conglomerate's debt.
Analysts said Dubai's woes were a blow to sentiment, serving as a reminder that potential trouble spots remain.
"I don't see this as a massive issue but it's another warning to where the world got itself last year with loose monetary conditions [and] loose lending," said Naeem Wahid, market strategist at Lloyds TSB. "And, in a few cases, the problems are still out there and we could continue to see these kinds of nasty surprises" in the future.
The news sent the cost of insuring the emirate's sovereign debt against default soaring for a second day. The developments also weighed on other emerging markets, boosting the cost of insurance against default against other Middle Eastern and emerging-market countries and undercutting Central and Eastern European currencies.
Asian stocks fell early Thursday. European stocks were under pressure, with the pan-European Dow Jones Stoxx 600 index off nearly 2%.
London trading was halted for a technical problem. But before the halt, concern about the exposure of British banks to Dubai helped send London's FTSE 100 index down nearly 2% and weighed on the British pound, strategists said. See London Markets.
U.S. financial markets are closed Thursday for the Thanksgiving Day holiday.
The Japanese yen benefited from safe-haven inflows, setting a 14-year high versus the U.S. dollar. The greenback, however, rebounded versus most major rivals on haven-related inflows. See Currencies.
Dubai-related jitters undercut the euro and commodity-oriented currencies that have tended to rally amid rising market optimism and investor risk appetite.
The dollar index (DXY 74.59, -0.80, -1.06%) , a measure of the greenback against a trade-weighted basket of major rivals, rose 0.3% to 74.495. The euro slipped 0.4% versus the dollar to $1.5069 and dropped 1.1% against the Japanese yen to 130.75 yen.
Analysts at Credit Suisse estimated Thursday that European banks they cover could have exposure of around 13 billion euros ($19.6 billion) to Dubai.
The broker said a 50% loss on the exposure would be equivalent to around a 5% increase in provisions in 2010 or a hit of around 5 billion euros after tax for the European banking sector as a whole. Analysts cautioned that the numbers are difficult to quantify and exposures will differ from one bank to another.
Dubai five-year credit default swaps soared to 571 basis points on Thursday, up 131 basis points from the close Wednesday in New York, according to CMA Datavision in London.
That means it would cost $571,000 a year to insure $10 million of Dubai's sovereign debt.
Five-year CDS spreads for other nations in the Middle East also rose, with Abu Dhabi rising to 169 basis points from 136.4. Qatar rose to 129.5 Thursday from 103.7, CMA said, while Saudi Arabia rose to 114.7 from 90.4 and Bahrain rose to 222 from 194.5
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