Investors' perceptions of the sovereign debt of Dubai and Bahrain may mark a significant shift in coming days or weeks: the cost of insuring Dubai's debt against default may drop below the cost for Bahrain for the first time in over three years.
Dubai's five-year credit default swaps have narrowed dramatically since the emirate was hit by a corporate debt crisis at the end of 2009. The catalyst for the crisis -- weakness in the real estate market -- has not been resolved, but progress in restructuring debt and economic growth in Dubai have convinced most investors that disaster will be avoided.
Dubai's CDS are now quoted at 372 basis points, a far cry from levels around 650 bps hit days after Dubai World announced it needed to to restructure some $25 billion in debt in late 2009. CDS hit lows of around 320 bps last year; they then soared back above 500 bps briefly as the euro zone debt crisis worsened, but have since mostly been in a downtrend.
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