Bianco: Dubai is First Credit Crisis Since March Recovery

Posted by urbandigs

Sun Nov 29th, 2009 09:00 AM

A: Interesting tag for it, but I am not sure I agree with it. While $80Bln is no small sum of money, it pales in comparison to the total credit losses taken since the start of this crisis; a total that is nearing $2 trillion. Yes, it was that much. Besides, already it seems that the UAE Central Bank will 'intervene' with a liquidity facility to calm the markets and contain the situation. What's interesting about the tagline for what occurred a few days ago in Dubai, is both the timing & situation that the 'debt service standstill' news came out in. That, and that alone, was the reasoning behind the carry trade discussions here on UrbanDigs about four weeks ago, a blog with a focus on Manhattan real estate.

According to Jim Bianco's, "Dubai – The First Credit Crisis Since March Market Recovery":

It appears this is the first credit crisis since financial markets began their recovery. So while many are trying to dissect the particulars of this case (Dubai gets its money from Abu Dhabi who will eventually bail them out), they are missing the larger issue. As we have been arguing for months, markets have been rallying non-stop on the back of cheap money. This carry trade has led to many bubbles in the markets. A solvency issue causes the dollar to rally (not good for the carry trade) and investors to “blink” from risk markets. This is not good when financing your entire position at 0%.

This is more about the timing of the issue than the issue itself.
Yes. Exactly. And this is why I stated:
"Hard to time the end of this game or to predict the spark that may light the fire. Maybe its China? Maybe something else. Who knows - for now its ride the carry gravy train for as long as possible."
...in my "Carry On! A search For Yield" piece only 12 days ago. That discussion focused on the $500bln or so that left Money Market Fund Assets to the outside of the curve, to stocks, to high yielding bonds, to securities tied to mortgages, to basically anything all in the search for yield! With the dollar as the funding currency and the fed/treasury backstopping and guaranteeing everything, the carry trade was on and getting dangerous. A number of events could have qualified as a spark to light the fire and cause a significant and notable unwind that hit global markets - and when global markets get hit, eyes open up. In this case, it came out of Dubai and the inability to service debt tied to some $80Bln in loans.

Now, in a housing marketplace where confidence was rebuilt on a weak foundation of a fed engineered reflation environment, the ripple effect to buyer confidence could be quick and noticeable. What I mean is, if this does sustain itself and prove to be a spark to a bigger fire, buy side confidence can quickly fall with the snap of a finger affecting our local markets for another brief period of time. That my friends is the reason why the carry trade was worth discussing here on this blog. Bianco is right, it is "more about the timing of the issue, than the issue itself".

I just wonder if this really qualifies as another credit crisis. With news that the UAE central bank is intervening, I'm sure the markets will get what they want; yet again. Therefore, at this point I think that calling this a 'crisis' is a bit pre-mature, although, worth keeping an eye on in the weeks to come. My eyes will be watching:

a) Libor - for interbank lending stress
b) Corporate bond spreads to treasuries - for corporate credit stress
c) TED spread - for interbank lending stress; flight to safety of treasuries
d) Countries CDS (credit default swaps) - for rising sovereign credit default fears
e) The US Dollar - for a flight to safety, sign of a sustained carry trade unwind
f) Commodities - for signs of a flight out of riskier assets, global growth concerns
g) RMBS/CMBS - for signs the reflation rally may be over
h) VIX - for signs of market nervousness and rising volatility

...all which could impact funding costs and the ability to rollover and finance existing debts. It gets bad when banks don't want to even lend to each other and short term lending markets start to freeze up. As of now, this is not the case from this event. I'll do a piece checking into these guys early next week to see if there was any jolt from this global situation. It'll be another credit crisis if the above noted indicators start to go haywire again. For now, its just too early and we don't know how the Dubai 'debt service standstill' may get fully resolved to sooth market jitters across the board. We will know more this evening when Asian markets and futures open for trading.

Some non-core assets that Dubai debtors hold and may hit the auction block here in Manhattan include (via NY Post):

  • The Jumeirah Essex House, the 78-year-old, 43-story luxury hotel on Central Park South whose iconic rooftop sign is a landmark in the city

  • Knickerbocker Hotel, the John Jacob Astor-built Times Square Hotel on the southeast corner of 42 Street and Broadway in which, legend has it, the martini cocktail was invented

  • Barneys New York, the famous, upscale apparel chain that Dubai's Istithmar unit purchased 26 months ago for $937.4 million, but which has struggled under the weight of the recession

  • Dubai World, through its Istithmar investment arm, also owns the New York W and Mandarin Oriental hotels



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