- Clive Maund

What was really odd about yesterday was that we saw a big dollar breakout, but Treasuries fell heavily. We are now believed to be on the verge of another massive deflationary downwave, similar to last year, but worse. However, this time it is very possible that while we will see a flight to cash, we will not witness a stampede into Treasuries, or at least not on anywhere near the same scale. So what is going on here? - what are the principal underlying dynamics? Anyone who has had the misfortune to watch a nuke exploding, misfortune because you get irradiated, knows that first you see a very bright flash, then there is a period of tranquillity as the flash dies down and the mushroom cloud starts to rise, before the shockwave hits, when things get pretty rough to say the least.

Youv'e seen the flash - now get ready for the shockwave...

What happened in Dubai just over a week ago was the bright flash, and the media have used the intervening period before the shockwave hits to reassure everyone that everything is going to be just fine - "You just relax, nothing will come of it, it's only $60 billion down the drain or whatever - have a cup of tea". The trouble is that it's not $60 billion at all - the reality is that this is a default on a massively larger scale. Dubai was a vast sinkhole into which western banks and governments unquestioningly poured not just billions but trillions of dollars which was then leveraged enormously by means of derivatives enabling Dubai to build itself up into a latter day Rome, with a level of opulence and extravagence that would have made Caesar green with envy.

When people think of Dubai the things that come to mind are the massively extravagent 7-star hotels, the towering record breaking skyscraper, palm-shaped island resort complexes etc and forests of new office buildings and apartments etc. What the vast majority don't realize is that the stupendous leverage afforded by derivatives has in addition enabled Dubai to create an immense global empire of businesses, most of the elements of which are broke, having racked up staggering levels of debt. Dubai is the nexus of the derivatives pyramid and it is flat, stony broke.

Where did all the money come from to pay for all these things? - why from taxpayers and pension fund contributors the world over of course, but especially in the US, with Wall St acting as a giant conduit sluicing a torrent of cash into Dubai. The interesting thing is that there was never any accountability - countries and companies vied with each other for the privelege of pumping money into the exalted kingdom, seduced by its supposedly limitless oil wealth, and requesting or requiring guarantees was regarded as impolite. Now that Dubai is broke, the Dubai government has suddenly distanced itself from Dubai World, and the attitude towards the Western banks and governments who have poured trillions into Dubai is "Tough luck - you lose, suckers".

What this means is that trillions of dollars which are now counted as assets on the balance sheets of banks worldwide and especially in the US are actually liabilities. So what do you think is going to happen to the stock prices of these banks - and stockmarkets generally, when the world wakes up and acknowledges this reality - when the shockwave hits?? Small wonder that the charts for Goldman Sachs and J P Morgan look very like the market charts before the '87 crash, but that was "small potatoes" compared to what is coming down the pipe this time.

more HERE

-Philip Bowring

Malaysian and other Islamic bond issuers could suffer

The revelations of Dubai's monster debt problems have come at an unfortunate time for Malaysia's push to promote itself as both global centre and international mentor in the field of Islamic finance.

Even if the there is eventually no default on Dubai's sukuk (Islamic bond) issues the image of sukuk as potentially safer than conventional instruments has suffered a blow. Malaysia itself may have little exposure to Dubai, or other over-extended Gulf borrowers, but as the world's leader in sukuk issues it could well see a marked slowdown in what has been a very rapidly expanding business.

The first test will come by December 14 when Nakheel, the property developer arm of state-owned Dubai World, has a big sukuk maturing. Despite a statement Sunday by the United Arab Emirates central bank that it stands behind domestic and foreign banks operating in Dubai, later tests will come if defaults arise and battles begin over how civil courts interpret legal rights under shariah law. There may also be battles if Nakheel or subsequent debtors favor sukuk over conventional bondholders or vice versa. A sukuk is supposed to have an element of risk lacking in secured bonds, but practice is another matter in an industry which is still young.

That is bad luck for a Malaysian industry which can reasonably claim to be both innovative and well-organized. Malaysia accounts for roughly 60 percent of total global sukuk issues totalling around US$100 billion. These are roughly divided between ringgit and US dollar issues, mostly by local entities but also by the World Bank and the Islamic Development Bank. Malaysia has been hoping to attract other big-name foreign institutions to its market.

But Dubai is unlikely to represent a permanent setback to Islamic finance, which has been growing in many parts of the world and establishing niches in developed Muslim-minority countries such as the UK.

more HERE


Dubai World Shock Sends Asian Sukuk Yields Higher

The shock from Dubai World's restructuring and call for a standstill on its group debts sent yields on Islamic bonds issued from Asian borrowers sharply higher Thursday. The sukuk of the Indonesian government and Malaysia's national oil company Petronas were particularly hard hit. But many were convinced it was a knee-jerk reaction. The yield on Petronas' 2014 sukuk traded around 0.15 percentage point wider over U.S. Treasury yields. "It may be temporary," said Rajeev De Mello, a fund manager at Western Asset Management in Singapore. The credit event could even have the opposite impact of eventually attracting money into Asia's sukuk" because Middle Eastern investors might want to diversify a bit more into non-Middle Eastern sukuk," he said.

The Dubai government said Wednesday that it would restructure its largest corporate entity, which has interests spanning real-estate and ports. Dubai World, which has almost $60 billion worth of liabilities, will seek a six-month "standstill" on its debts with all lenders, the government said.

Some players sold the sukuks from Indonesia and Petronas on the fear that some of these bonds may be held by Middle Eastern investors, who may opt to unload some of their holdings after the Dubai government's announcement, according to a fund manager.

more HERE

- Wade Slome

Introducing Sukuk: Islamic Loophole for Dubai Debt Debacle

Islamic followers can be capitalists too. Although oil prices (currently around $77 per barrel) have fallen from the peak near $150 per barrel in 2008, oil rich nations have gotten creative in how they raise debt-like financing. Critical to fueling the speculative expansion in some oil rich areas has been the growth in sukuk bonds, which have been created as a function of loophole exploitation in Islamic finance principles.

U.S. Does Not Have Monopoly on Debt Driven Greed

The pricked debt bubble that spanned the range of Icelandic banks to Donald Trump (read more) has now spread to Dubai commercial real estate, evidenced by the plastering of recent global headlines. At the center of the storm is Dubai World, a quasi-government owned conglomerate of Dubai, which is in the process of negotiating a $26 billion debt restructuring with the government and sukuk bondholders.

This overleveraged Dubai market ($80 billion in total debt) helped finance the tallest building in the world, largest man-made islands, and a ski-resort based in the desert, in the face of collapsing real estate prices. Critical to Dubai World’s debt restructuring is a $3.5 billion sukuk bond issued by its commercial real estate subsidiary Nakheel Development (“Nakheel”). So what exactly is a sukuk (plural of sakk)?

Investopedia lists the following definition for sukuk:

“An Islamic financial certificate, similar to a bond in Western finance, that complies with Sharia, Islamic religious law. Because the traditional Western interest paying bond structure is not permissible, the issuer of a sukuk sells an investor group the certificate, who then rents it back to the issuer for a predetermined rental fee. The issuer also makes a contractual promise to buy back the bonds at a future date at par value.”

more HERE


M'sian Islamic banks not affected by Dubai crisis

PETALING JAYA: The debt payment crisis of conglomerate Dubai World will not adversely affect the Islamic finance industry in Malaysia as it has limited exposure to the sheikhdom’s debt, according to industry observers.

CIMB Islamic Bank Bhd CEO Badlisyah Abdul Ghani said the situation in Dubai was purely a credit issue and applicable for both conventional interest-based and Islamic capital market in the Middle East.

Credit issue was not exclusive to Islamic capital market and the problem Dubai was facing had no bearing on the structure of the sukuk market or its instruments in particular, he said in an email reply to StarBiz.

“What’s happening in Dubai has no impact on Islamic finance in Malaysia as Malaysian Islamic banks are not exposed to the Dubai market, with most concentrating on doing business in Malaysia only or regionally in South-East Asia. If (there is) any, exposure would be extremely insignificant,” he added.

The Malaysian Islamic finance industry, he said, was unparallelled in terms of depth and sophistication and had gone through two major global financial crises with one involving Malaysia directly and emerged practically unscathed both times.

Ernst & Young Advisory Services head of assurance Abdul Rauf Rashid agreed, saying that there was limited direct implication to the local financial industry as not many investors were directly exposed to Dubai or papers issued by organisations from the Gulf Cooperation Council (GCC) countries.

In response to a query, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said: “The Malaysian conventional and Islamic banks have limited exposure to Dubai and the recent development has not had an impact on their operations.

“The fundamentals of the banking system remain strong and continue to support the economic recovery process.”

more HERE

Posted by Mr Thx Monday, December 7, 2009


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Sekapur Sirih Seulas Pinang

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Alor Gajah, Melaka, Malaysia
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