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Friday, 5 February 2010

Sovereign Risk Meets Sovereign Reality


After months of shrugging off debt problems in Dubai, Greece and other smaller economies, markets yesterday seemed suddenly aware of the risks of sovereign default.

Back in November, when the question of Dubai's solvency came to a head, it was ultimately bailed out by its rich older brother, Abu Dhabi. Now, the European Union is doing its best to avoid promising a similar bailout to Greece, though in the end few believe Brussels will allow Athens to go under.

The current crisis in Greece is only the worst example inside the EU. The PIGS—Portugal, Italy, Greece and Spain—all boast public debt above or headed for 100% of GDP. Though the PIGS acronym was apparently coined by British bankers, Britain, Ireland and Iceland also smell distinctly of bacon.

The problem isn't confined to Europe. Japan and the United States, by most reckonings the world's largest economies, also face pressing questions about their sovereign debt levels. To be sure, the U.S. and Japan can sustain such deficits more comfortably than small countries like Greece or Portugal where the government's ability to curb public-sector spending is rightly suspect. Yet even in economic giants, bad policy could cause investors to move out of debt they have long considered a safe haven. The moment is approaching when the artificial line separating the wealthy from emerging markets will lose much of its relevance.

Getty Images
The Burj Dubai has become a symbol of excess.

Countries like Germany, whose fiscal balances have deteriorated largely due to the economic downturn, might have a greater capacity to stabilize their debt ratio. The U.S. and Japan will also be among the last countries to face investor aversion. This is because the dollar is the global reserve currency, and the U.S. has the deepest and most liquid debt markets. Japan is a net creditor and largely finances its debt domestically. But over the next few years, investors will become increasingly cautious about even the U.S. and Japan if the necessary fiscal reforms are delayed.

Investor perceptions about how Brussels handles the current crisis will be a key factor going forward. European countries such as Spain and Greece have delayed reforms and face a severe competitiveness problem. Japan's aging population and economic stagnation is reducing domestic savings. The U.S. is a net debtor with an aging population and slower growth.

For the U.S., the implications are clear. The annual fiscal deficit in the U.S. will remain close to $1 trillion over the next decade. Ultimately, concerns among foreign investors about a weak dollar will force Washington to put its house in order. The U.S. will have to raise taxes on most income groups and investors, close tax exemptions and loopholes, and reduce entitlement benefits.

Foreign creditors won't suddenly move away from U.S. Treasurys—the trend will play out gradually. The same holds true for domestic investors who consider U.S. Treasurys a safe haven and remain confident about the country's debt-servicing ability relative to other developed economies.

But as the Federal Reserve begins to raise interest rates to head off inflation—something likely to begin only in 2011—foreign investors and central banks will be willing to finance the U.S. only at higher yields. Rising interest costs will be one of the factors constraining U.S. policy. That's where sovereign risk meets sovereign reality.

Mr. Bremmer, president of Eurasia Group, is author of the forthcoming book "The End of the Free Market: Who Wins the War Between States and Corporations?" (Portfolio). Mr. Roubini is a professor of economics at New York University's Stern School of Business and chairman of Roubini Global Economics.END

BAE pays $400m to end corruption case

The arms maker BAE Systems is to pay more than $400m in penalties to settle bribery allegations in a groundbreaking transatlantic settlement of Britain’s biggest and most politically contentious corporate corruption case.

The company will pay the vast bulk of the fines in the US, while it will hand over £30m in the UK and plead guilty to a minor Companies Act accounting record offence.

The agreement is bound to provoke sharp debate – particularly in the UK – about whether BAE is being punished sufficiently, given the size and scope of the corruption allegations against it.

Dubai says aid to Dubai World on commercial terms

Dubai said on Friday that aid given to Dubai World [DBWLD.UL] was on commercial terms, after a report that collateral for further aid was delaying a deal to address the conglomerate's unmanageable debt burden.

The Dubai Financial Support Fund (DFSF) has given the company, which is trying to reach a standstill agreement with creditors on delaying $22 billion in debt, about $6.2 billion over the past 12 months and stands ready to provide "considerably more", a spokeswoman said.

"This money was made available to the DFSF on commercially reasonable terms, and the DFSF has endeavoured to advance these funds to the company on a commercial basis," the spokeswoman, who spoke on customary anonymity said.

Abu Dhabi to take Gatwick stake

The owners of Gatwick have sold another stake in the airport, this time to Abu Dhabi’s sovereign wealth fund. The move comes days after news that South Korea’s National Pension Service would take a 12% stake in Gatwick for just under £100m. Abu Dhabi Investment Authority is believed to have taken a stake of nearly 15% in the airport, which was sold late last year to the Global Infrastructure Partners investment fund for just over £1.5bn. GIP said then that it would sell some minority stakes in Gatwick but retain overall control.END

Lord Mayor to Lobby Sheikh on U.K. Bank Dubai Debts

Nick Anstee, the 682nd lord mayor of the City of London, plans to ask Dubai’s ruler, Sheikh Mohammed bin Rashid al Maktoum, to help British banks owed money in the second-largest sheikhdom in the United Arab Emirates.

“There are about five banks which are owed a considerable sum of money,” Anstee, 51, told reporters yesterday at Mansion House, the lord mayor’s Georgian palace opposite the Bank of England. “I have a reasonable expectation that I will meet all parties from Sheikh Mohammed al Maktoum downwards.”

Dubai last year turned to wealthier neighbor Abu Dhabi for a bailout as its debt-fueled growth stalled. The lord mayor, who will visit Dubai, Abu Dhabi and Qatar from Feb. 6 to Feb. 10, is the elected leader of the City of London, the U.K. capital’s financial district.

Dubai World Unit Exits Indian Budget Carrier SpiceJet

Istithmar World PJSC, a unit of Dubai World, sold its 13 percent stake in SpiceJet Ltd., said Ajay Singh, a director at the Indian budget carrier.

Istithmar sold the stake to mutual funds, Singh said in a phone interview today. The Dubai fund continues to hold some bonds issued by the airline, the official said. A phone call made to Istithmar wasn’t answered during the weekend holiday in Dubai.

The Bombay Stock Exchange Web site at 5:30 p.m. showed DWS Invest BRIC Plus fund bought 8.85 million shares, Reliance Mutual Fund picked up 4.5 million shares and Birla Mutual Fund purchased 10 million shares from Istithmar. All the funds bought the shares at 52 rupees each.

SpiceJet shares, which have more than tripled in the past year, fell 1.65 percent to 53.8 rupees at close of trading in Mumbai.

In August 2008, billionaire investor Wilbur Ross and Goldman Sachs Group Inc. agreed to invest as much as $100 million in the airline.END

Gulf fund managers upbeat on markets

Gulf fund managers are likely to find a reduced appetite among foreign institutional investors as they assess the impact of the Dubai World debt restructuring on regional markets, a top ratings agency said yesterday.

But despite these concerns, most fund managers surveyed by Standard & Poor’s remained upbeat about the fundamentals of the regional companies in which they have invested.

“The news [about Dubai World] came as a surprise to just about everyone,” said Roberto Demartini, the lead analyst at S&P Fund Services, which rates 14 regional funds in the region. He said most analysts perceived the investor mood as a “crisis of confidence”.

Dubai World repayment plan hits an obstacle

Dubai World and its creditors have hit an obstacle in negotiations over a proposed standstill on the conglomerate’s US$22 billion (Dh80.8bn) of debt, The National has learnt.

The Dubai Government-owned group said in November that it would seek to delay debt repayments to 97 banks as part of a plan to give Dubai World time to restructure while preventing creditors from pursuing legal action to recover what they are owed.

But informed sources said the banks had yet to agree to standstill proposals from Dubai World and the Dubai Financial Support Fund (DFSF), a government entity set up to distribute the proceeds of a $20bn bond programme to struggling state-owned firms.

Dubai eyes $1.2 bln Limitless loan rollover - sources

Dubai World will seek to roll over a $1.2 billion Islamic loan at its Limitless property unit due in March but it is unclear whether banks will agree in the absence of a standstill agreement, banking sources said on Thursday.

The state-owned firm, which rattled global markets when it requested a delay on $26 billion of debt linked to its main property units Nakheel and Limitless World last November, has been negotiating with an unofficial bank coordinating committee. But it has yet to present a formal proposal on plans to repay some $22 billion in debt.

Limitless's two-year Islamic facility does not have the option of an extension which would mean the company would need to reach a new agreement with lending banks, according to loan documentation.

Bahrain SWF moves Gulf Air ownership to govt

Bahrain's sovereign wealth fund Mumtalakat said on Thursday it would transfer ownership of the country's loss-making national carrier Gulf Air [GULF.UL] to the Bahraini government.

"Bahrain Mumtalakat Holding Company, the investment company for the Kingdom of Bahrain, announced today its intention to divest its interests in Gulf Air, Bahrain's national carrier, to the Bahraini government," the fund said in a statement.

Talal Al Zain, chief executive of Mumtalakat, told Reuters an investment in the airline industry did not fit with the fund's investment strategy.


The latest data from the AAR continues to show a near-term rebound in rail traffic trends, however, the bigger picture is showing a more mixed recovery. For the week ending January 30th total carloads jumped 7% year over year, but declined 12.7% compared to 2008. Intermodal traffic was also mixed with a 7.5% jump from 2009, but down 9.7% from 2008. Breadth was again positive this week as 13 of the 19 commodity groups showed gains. All in all, this data continues to reflect the weak recovery, but is showing certain signs of a recovery from the low trough of 2009.