In Article 15 of the new edition of Reading and Understanding the Financial Times I examine what happens in bond markets when investors get concerned about the credit risk of various European governments. At the end of last week there were worries about bond issuers but this time they were in the Middle East. The main issue relates to Dubai with the bond investors set to meet this coming week with government officials to clarify the financial state of the state-owned company Dubai World. The investors are both very angry and extremely concerned about the current risk attached to their holdings. The company which is responsible for much of the state's massive property developments owes some $60bn and was due to make an interest payment of $4bn in December. The suspension of the bond repayments has acted to destabilise more general confidence in financial markets. Investors are also worried that the government debt crisis could escalate to embrace countries like Latvia, Hungary, Ukraine and even Greece. Against this background there is a worry that the fragile economic recovery could now be halted and we see a return to economic "doom and gloom". The UK Treasury must be very concerned again as British Banks seem to have massive exposures to this range of bond issuers. This could result in the need for yet more support for UK banks in coming months. The UK Government's financial state is already weak and these further commitments could further undermine the state of the nation's finances. How much longer will UK government bonds remain triple A rated?
Nov 29, 2009
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3 comments:
Hi,
1. Is this situation not expected, especially since they made properties investment in the USA?
2. Are sovereign wealth fund not guaranteed by the government issuing them?
3. When does company issue bond?
Hi to you,
Thanks for your comments?
In answer to your questions...
1) Yes I think it was very predictable indeed. The property investments were made with massive loans which could never be repaid.
2) This risk could not be covered by the Country as it does not have the wealth to do so. It might rely on some of nearby neighbours to bail it out.
3) A company issues a bond to finance a new investment.
Thanks
Kevin
I was wondering could it just be investors are being a bit too spooked I remember reading somewhere in the financial times someone just turned around and said that dubai are a blip in the grand scheme of things.
It wouldnt be as big of a deal if it wasnt for the fact there is still alot of pessimistic attitudes , investors are almost umping at their own shadows look dubai fall it does collateral damage the impact of this collateral damage varies on the vulnerability of the economy investors dont realise they are not helping themselves by panicking all the time. Let me know when america ,germany etc collapse other then that a blip is a blip . (Best anlogy is someone on life support if dubai collapses they have small stroke when someone far bigger collapses then they are dead the best thing to do is to live your life and hope that big heart attack dosent come along I dont think they sell financial times in the afterlife so you can relax)
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