FTSE Falls 2.75% After Dubai Debt News

Posted on | November 26, 2009 |

The FTSE endured a heavy bout of selling pressure today, as concerns over Dubai’s financial health threatened the prospects of a sustainable global economic recovery.

Dubai World, a major government-owned investment company that has total debts of $59 billion, has asked creditors if it can postpone its forthcoming debt obligations until at least May 30.

This development rattled market confidence, as it suggests that Dubai could essentially be bankrupt.

If this turns out to be the case then any banks exposed to Dubai’s debt will have to incur further bad-debt write offs and could even encourage them to start hoarding cash again – as they did following the collapse of Lehman Brothers.

Equally frightening is the possibility for Dubai’s woes spilling over into other Middle Eastern countries, causing an even bigger crisis.

In my view this scenario is unlikely, however. If it had to escalate to that point Dubai’s neighbour Abu Dhabi may even step in – although I must warn that this is only conjecture and nothing is yet certain.

Not surprisingly, panic selling stepped in, which may have been responsible for a technical glitch on the London Stock Exchange (LSE). The LSE said that today’s problems were due to a connectivity issue, which resulted in all FTSE 100 listed stocks and ‘order driven’ shares to come to a halt for more than three hours before resuming at 2pm (London time).

Shares of London Stock Exchange Group, whose largest shareholder is Borse Dubai Ltd, plunged the 6.3% 763.5p, most in nearly eight months. Banks were also in the red on fear that they may be exposed to more bad debts arising from Dubai’s dire situation.

Royal Bank of Scotland was the worst performing bank in the sector, down 7.7% to 33p followed by Barclays, which retreated 6.8% to 294.75p. Standard Chartered fell 6.3% to 1505p while HSBC’s share declined 5.1% to 703.1p. Lloyds fared relatively better, dropping only 3.9% to 90.54p.

Life insurers continued to haemorrhage as well, with Legal & General the sector’s worst performer, down 7% to 78.8p following Citigroup’s recommendation to ’sell’ the company’s shares. [1]

Resource shares were also struck by profit taking, as underlying metal prices retreated on the back of a rebound in the US Dollar.

Kazakhmys, Xstrata and Fresnillo were among the sector’s worst performers, all down by over 5.2% to 1222p, 1039p and 854p respectively.

In contrast, water companies managed to buck the negative trend, after the sector’s regulator Ofwat decided to cut water bills by less than anticipated over the next five years.

United Utilities saw its share price trade 0.7% higher at 487.4p while Severn Trent’s shares were 3.5% higher at 1041p following Ofwats decision. Northumbrian gained 3.7% to 265.3p.

By 3:40pm (London time) the FTSE 100 Index was trading 147.61 points lower (-2.75%) at 5217.2 while the broader FTSE 250 Index was 246.47 points (-2.69%) below its previous close at 5217.2.

US markets are closed for the Thanksgiving holiday, but electronic trading showed December S&P 500 equity futures down by 2% at 1086.5 and December Dow futures 1.6% lower at 10275.

Source: [1] Bloomberg News (26 November 2009)

By Anthony Grech, Research Analyst, IG Index.

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