The fact that the Dubai government asked to defer $20 billion in upcoming debt payments influenced European markets to trade lower on Thursday and had an equal effect on financial markets around the world. The sell-off continued in US markets on Friday. Although US firms have minimal exposure to any Dubai debt defaults, one thing to be aware of is that the dollar could see some buying interest as overseas investors may seek a safe haven amidst the sudden increase in risk. This short term upward move in the dollar would provide the downside correction in equities I have been waiting for.
Don't expect any drastic reactions to the Dubai situation in the coming week. There is still a lot of uncertainty regarding how much debt really exists, who is responsible for that debt and if the failure to repay that debt would influence the collapse of any banking institutions. The Royal Bank of Scotland underwrote $2.3 billion of the Dubai World Loans. RBS only declined 4.7% on Friday, not that much considering the news. At the same time, HSBC Holdings (HBC) has the greatest "known" exposure in the United Arab Emirates with $17 billion in loans in 2008. HBC declined 5.86% on Friday.
What is most alarming though, is if Dubai has hidden their debt problems since the financial crisis began, how many other institutions are hiding financial distress? If a multitude of previously concealed financial burdens are brought to the surface, we could see severe turmoil in the financial sectors and the markets as a whole. I can guarantee that there is a whole slew of negative balance sheets that we don't know about. A swift market correction is something we must be prepared to react to at any moment of any trading day in the coming days, weeks, months.
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