Dubai May Rattle Sovereign Debt Market With Bid To Refinance

As the efforts of nations in Europe to get Greece’s financial house in order seem to flounder, Dubai is likely to show just how volatile the sovereign debt market can be.

The Wall Street Journal reports that Dubai World may “offer its creditors 60% of the money they are owed, backed by the sheikdom’s government.” The desert kingdom will attempt to settle payments on the $22 billion in debt which is already in or near default.

Dubai’s action, if successful, could set a precedent for Greece, and perhaps Spain and Portugal. While a settlement might get creditors, many of which are multinational banks, back some of their capital, it would also cause tremendous write-offs that financial firms can ill afford as they emerge from the credit crisis that rocked the world in late 2008.

Greece might try to lessen the burden on its budget, suggest that it not pay full value for some part of its sovereign obligations. That would almost certainly cause a panic that would result in a sell-off in the debt of any financially weak nation and could even drive up the cost to borrow money for countries like the US and UK which have solid economies now, but also have growing deficits and credit needs.

The cost to borrow money for sovereign obligations in the global markets is likely to get much harder.

Douglas A. McIntyre