This announcement took markets by surprise, particularly because it followed earlier positive news that Dubai had successfully raised US$5 billion for a fund to support indebted government-related entities.
Furthermore, the timing of the announcement, ahead of the Eid al-Adha holidays, caught investors off guard at a time when market liquidity was thin.
Adverse market reaction
We have seen a near-term negative market reaction to this announcement.
Emerging currencies and the credit market have been hit. Equity markets have also reacted negatively, with falls seen across developed and developing markets.
In the short term, it is reasonable to expect MENA markets in particular to come under further selling pressure.
For this to reverse, and sentiment towards these markets to recover, market participants will need to see details of the restructuring, and also clarification of the level of banks’ exposure.
Stepping back from the last 24 hours
In late 2008 it became clear that the credit crunch was having a severe impact on Dubai.
Since this time, the expectation has been that Abu Dhabi would provide assistance to Dubai but that this assistance would probably have strings attached.
So whilst yesterday’s announcement was a surprise, and how the situation is going to be resolved is unclear at this stage, the problems facing the Emirate are widely recognised by the investment community.
Yesterday’s news undoubtedly proved a catalyst for investors to book profits on their equity positions, after the very strong run-up in share prices year to date.
Emerging markets have borne the brunt of the selling pressure, in part because of their previous outperformance.
