Dubai World – Another Subprime Mortgage ?
If we look at the history, it shows that the capital markets crisis always starts from the financial sector since 1900′s. By further investigation, it shows that the earliest indicator of the financial problems isthe default.We just heard that there is delay in payment of obligation by Nakheel Company (a subsidiary of Dubai World) is submitteddirectly by the Government of Dubai.This together with the pessimisticglobal capital markets are haunted by a lack of U.S. GDP(only 2.8%) with 10.2% unemployment rate.
Dubai World is a Dubai government-owned company thatengaged in various fields of infrastructure, one of which isNakheel.One of the famous Nakheel project is the Palm Island, a housing block in the middle of palm tree-shaped sea.Its funding sourcescome from obligation (3.52 billion USD), which expirationdate of payment is on 14th December 2009, is proposed to be postponed until 30th May 2010.This delay is certainly a negative effect for the holders, who are in desperate need of liquidity.
Subprime Mortagage part 2?
One of the major concerns is when the obligation price further dropped. This will led to the collapse of related investment such as mutual fund, unit link, and retirement funding, even banks (there are some banks that are predicted to suffer losses due to this case).These can effects on the portfolio investment.If the investorsrespond quickly and the withdrawal of funds was done in large amount andsimultaneously, then the rush will occur.Portfolio value can fall dramatically!
However, it is different from the subprime mortgage that is happening in America, where there is no underlying asset of this,so the value could actually completely go.However, the market value of real estate in Dubai havedecreased by 70%, this will certainly affect the warranty orunderlying asset given by Nakheel (sourcewww.bloomberg.com).In addition, a lot happens by default in the payment of such property, this will impact on liquidity in the Dubai property companies in general.
It can affect the price of other bonds that actually have better outlook(domino effect).Therefore, when this happens, it can impact together on the economic turbulence if the Dubai government did not immediately anticipate this problem as soon as possible.In addition, many analysts describe these event is similar as the case that occurred in Argentina.
