Instead of buying stocks, traders sold them as they tried to come to terms with news that Dubai World, a huge conglomerate, was asking lenders to give it some breathing room on paying the interest on about $60 billion in debt.
The Dubai news rattled stock markets around the globe, with some exchanges losing as much as 5 percent of their value. In the case of the Dow, it could have been worse – the market started off Friday morning with a 224-point drop.
If anything, the Dubai news reminded optimistic investors that financial problems continue in the wake of the economic turmoil of the past two years.
“We should not have thought we were past all this,” says Douglas Elliott, a fellow at the Brookings Institution in Washington, a think tank. “There will be some further problem. For example, we know smaller banks have a lot of losses in real estate.”
In fact, actual losses from problems at Dubai World could be quite manageable, says Mr. Elliott, a former investment banker. “Even if they have $80 billion in debt, most will be paid back. The loss at the most would be $20 billion, which is nothing when you have stock markets worth trillions.”
The Dubai scare, he says, is “too small to matter, except as a symbol of something larger, such as the fact [that] there is still risk out there.”
That risk caused one investor, Bernard Baumohl of The Economic Outlook Group in Princeton, N.J., to sell some gold and petroleum company shares on Friday. In addition, he increased his exposure to the US dollar because of the risk that more negative news could emerge from Dubai over the weekend.
“What drove our decision to make portfolio changes today was simply prudence and a desire to capture gains achieved this year,” he wrote in an analysis. However, he envisions returning to the markets next week to buy more shares – now that they are selling for less.
“There is a real concern over whether this is a one-off event or something more ugly, perhaps something that will spread,” he says, adding, “I don’t think we’re going to have a domino effect where problems in Dubai spread to other places.”
The market’s reaction might have been different if so many investors hadn’t been relaxing or out shopping instead of trading stocks, says Mr. Roberts.
“Not a lot of people were working on this scenario,” he says. He anticipates that many investors will reevaluate the scope of the financial problem on Monday, when more information is available.
Abu Dhabi is an oil-rich and more conservative emirate than Dubai, which has invested funds in real estate developments and other businesses around the globe.
“The older brother [Abu Dhabi] will help out, especially for political reasons,” says Brookings' Elliott.
However, Dubai World officers are likely to get an earful from Abu Dhabi, says Roberts. “It’s kind of like the financial crisis here, when those who saved money and did not get financially stretched asked why they should be asked to bail out people who were not prudent,” he says.
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