Monday, November 30, 2009

Dubai Debt Insurance Cost Falls

Posted by Minjune Kim

LONDON -- The cost of insuring Dubai's sovereign debt against default fell Monday as investors' concerns about the region were allayed after the United Arab Emirates central bank pledged support for the country's local and foreign banks.

It now costs $576,000 to insure $10 million of Dubai sovereign debt against default for five years, down from $647,000 at Friday's New York close, according to data provider CMA.
The cost of insuring neighboring Abu Dhabi's sovereign debt also fell Monday. It now costs $146,000 to insure $10 million of Abu Dhabi's sovereign debt against default for five years, down from $175,600 at Friday's close.

The drop in cost comes after the U.A.E. central bank said Sunday it is offering an additional liquidity facility to local and international banks in the U.A.E. and stressed that it "stands behind" them. Dubai and Abu Dhabi are two of the seven emirates that make up the United Arab Emirates.

Last week, Dubai World's restructuring announcement also affected countries such as Greece, as investors became increasingly concerned about financially stretched countries. However, the cost of insuring Greece's sovereign debt also fell Monday as it benefited from the improved tone in financial markets. It now costs $192,000 to insure $10 million of Greece's sovereign debt against default for five years, down from $200,000 at Friday's close, according to CMA.

Meanwhile, the five-year credit default swaps for Dubai-based port operator DP World tightened Monday to 6.425 percentage points compared with its closing level Friday of 7.44 percentage points, CMA said. The port operator's CDS moved as wide as 8.10 percentage points during trading on Friday.

Dubai World owns 77% of DP World, which is the fourth-largest ports operator in the world. The port operator will be excluded from its parent's debt standstill talks and restructuring.

CDS are tradable, over-the-counter derivatives that function like a default insurance contract. If a borrower defaults, the protection buyer is paid compensation by the protection seller. Wider spreads show the cost of default insurance is going up, suggesting investors are less confident in a borrower's ability to repay debts.

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1 comment:

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