Emerging markets

Investors in the Middle East were given a nasty scare on November 25 when Dubai World, a government-owned holding company, announced it would request a standstill on billions of dollars of debt. An intervention by Abu Dhabi, which provided $10 billion in financing to Dubai World on December 14, offered some relief – in particular, to investors in a $4.1 billion sukuk issued by Nakheel, a property company owned by Dubai World, which was due to mature that day. However, plenty of uncertainty remains. Dubai World still intends to pursue its request for a debt standstill – a move that could trigger the first major test of the Islamic debt markets.

The Dubai World issue has exposed a number of potential weaknesses in the Islamic finance market. For a start, many sukuk investors appear to be unsure of their rights in the event of a default or restructuring. In addition, there is uncertainty over how a sukuk structured under English law would fare if a bankrupt issuer is domiciled in the Gulf. Would a Dubai court, for instance, recognise a ruling made by a UK judge? This has never been tested.

The events in Dubai caused a major blip in emerging markets, with many countries experiencing a widening of spreads in the immediate wake of the November 25 announcement. However, this isn’t the only issue hanging over emerging markets. In Asia, a number of countries are preparing legislation to tighten up the sale of over-the-counter derivatives. For global banks that had typically run their derivatives trading operations from regional headquarters in Hong Kong or Singapore, the new rules could force them to radically change their business models.

Meanwhile, in the Baltic region, a dramatic fall in property prices has left Scandinavian banks in particular saddled with billions of euros in non-performing loans. Faced with the prospect of repossessing homes and selling them on for a fraction of the loan value, some Scandinavian banks have set up special-purpose vehicles to manage the properties until markets recover.

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Further reading

• Structured products

Scuppered by sukuk

• 07 Jan 2010

• Credit risk

Bargain basement in the Baltic states

• 07 Jan 2010

• Regulation

Hub hubbub

• 07 Jan 2010