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Weeding Through Dubai's "Family Rivalry"


From the perspective of the markets, the key player is Abu Dhabi.

Editor's Note: This article was written by Mike O'Rourke, chief market strategist for BTIG.

Dubai Bye-Bye

The Dubai debt standstill story started on Wednesday, but didn't impact that fairly uneventful pre-holiday US trading day.

Government-owned Dubai World requested a six-month standstill while the Dubai Financial Support Fund attempts to restructure Dubai World.

Dubai World has approximately $60 billion in debt, and it has been reported that off-balance sheet exposures could potentially increase that by $20 billion.

When trading in Asia commenced, the reverberations started.

Financial markets focused on the exposures of banks here in the West, primarily in the UK and Europe. It's believed that European institutions have approximately $40 billion in exposure to Dubai, but for most of the individual banks, reporting is with respect to the United Arab Emirates as a whole.

HSBC comprises 15% of the Hang Sang Index and has $17 billion in loan exposure to the UAE, hence we have the reason for the aggressive selling in Asia. There's little doubt the uncertainty should have created some volatility.

As the situation has continued to develop, the crisis is akin to a family rivalry where the upstart youth has recklessly borrowed from his wealthy cousin and friends and spent the money even more recklessly. Now, the cousin is putting his foot down and telling his rambunctious relative that the free ride is over.

Other Western exposures to the UAE that have been reported are: Standard Chartered -- $7.8 billion; Barclays (BCS) -- $3.6 billion; RBS -- $2.2 billion; Citigroup (C) -- $1.9 billion; and BNP Paribas -- $1.8 billion.

From the perspective of the markets, the key player in the UAE is the wealthy older cousin, Abu Dhabi. Abu Dhabi's banks have the major exposures to Dubai, which Abu Dhabi can afford.

The Abu Dhabi Investment Authority (ADIA) is the largest Sovereign Wealth Fund in the world,
with estimates of $500 billion to $700 billion in assets today, down from a level believed to be $800 billion to $900 billion a few years ago.

If that isn't enough to instill confidence, Abu Dhabi controls 90% of the UAE's 97.8 billion of barrels of proven oil reserves, or 7% of the world supply. At today's prices for Crude, that's more than $6 trillion in reserves.

Abu Dhabi will likely become the owner of some neighboring real estate, but if there was ever a crisis setup to be digested internally, it's this one. Global Exposures are limited and the players directly on the hook have more than enough assets to digest the losses. This is reminiscent of California paying its bills with IOUs earlier this year.

Dubai Debunking the Carry Trade

While it's fair to say the slow holiday trading action in the United States potentially means that additional repercussions may still be fleshed out, the other global markets have had ample time to digest these developments.

In many cases, markets have already commenced bouncing following the initial sell-off.

Regardless, when the news of a crisis sends most global markets down 5% over the course of a few trading sessions, a certain degree of de-risking should be expected to occur.

When the crisis emanates from a developing economy, one would expect some unwinding by those players who have borrowed in US Dollars and converted them into other currencies around the world to invest them in riskier assets. While the Dollar bounced Thursday and Friday, the combined two-day move in the Dollar Index wasn't enough to recover the losses incurred on Wednesday.

Sure, there are people out there who have the trade on in some form, but the trading action of the past week is an indication that it is a fraction of the size and influence for which it gets credit.

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No positions in stocks mentioned.

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