I Don't Know Why You Say Dubai I Say Hello

Dubai's possible sovereign debt default is turning into a disaster.  Credit Suisse says Euro banks may be in as deep as $40 billion.

The broker said it's identified $10 billion of bonds issued by the government's Dubai World investment vehicle just since 2005, along with a further $26 billion of syndicated loans.

Fears of a potential sovereign default by Dubai roiled financial markets Thursday, sinking stocks across Asia and Europe and pushing up government bond prices, after Dubai said late Wednesday it would restructure Dubai World and announced a six-month standstill on repayments of the conglomerate's debt. See full story on the impact on financial markets.
 
In a note to clients, Credit Suisse said the middle-East region is unlikely to be more than 1% to 2% of banks' total exposure and Dubai itself would just be a small part of that.

Still, it estimated that a 50% loss on the exposure that bank's may hold would be the equivalent of a 5% increase in provisions in 2010.

For the banks that Credit Suisse analysts cover, which could have an exposure of around 13 billion euros ($19.6 billion), that would equate to a combined hit of around 5 billion euros, it added.

(More after the jump...)

The problem is all the banks are standing on top of poles, trying to juggle fire.  A bunch of poles just got knocked out from under the banks, and we keep getting closer to another event where the whole mess comes tumbling down.

CalcRisk documents the atrocities as does Yves at NakedCap.

Yves here. On the one hand, there has been a reassuring announcement:

The Department of Finance said yesterday it raised an additional $5 billion from two Abu Dhabi lenders as part of its $20 billion Dubai support fund geared toward meeting its financial obligations.

However, Dubai is seeking a standstill on its debt while it renegotiates. I’m not a credit default swaps expert, but that sound like an event of default to me, and if so, that has the potential to have all sorts of repercussions. First, creditors who are not fully hedged who are subject to mark to market reporting will show significant losses. Second, the CDS protection sellers will also be showing losses and posting collateral.

One analyst has already deemed the risk to be overblown, and if the restructuring happens quickly and does not involve much in the way of losses to creditors, this indeed may not be a big deal.

But I got a message from someone who was on the conference call that suggested otherwise. Some European banks may be on the wrong side of this trade. As readers may know, EuroBanks went into the crisis with even lower capital levels than their US counterparts, and have taken fewer writedowns of their dodgy exposures:

The standstill announcement…was a massive surprise. One could sense the panic in those asking questions….this could be the turning point in spreads and could be viewed similar to the Russian debt crisis in 1998 or the Bear situation in 2007…based on companies and the accents of the people asking questions, it is obvious European institutions will be hit hard…Dubai made this announcement at the beginning of a four day holiday, so there will be little news until next week…There is another wave of pain out there. This information does not seem to be making its way to other markets. It will.

And that's not a good thing. Timberrrrrrrrrrrrr! Watch the U.S. markets Monday, it won't be pretty.