Dubai Sovereign vs Dubai Inc Debt

Today's Financial Times also has an article on the price differential between Dubai sovereign debt and that of its non sovereign companies.

The key point here is that market pricing  has reduced after the precipitous increases occasioned by the debt standstill announcement by Dubai World/Nakheel.   In response the markets reacted by treating all Dubai debt the same. 

A more careful subsequent look at the actual legal agreements (something more "advanced" bankers I am told are wont to do) and the Government of Dubai's clarifying statement that they would not be providing a post-default guarantee, more distinction in pricing occurred.  While Nakheel bonds are reported to trade at 50 cents on the dollar, sovereign Dubai debt trades at 90 cents.

It's important to know when looking at market prices for bonds (other than US Government bonds) and CDS that in general these markets are thin.  A relatively small number of transactions can affect price, especially if the prevailing sentiment is all one way.  The risk that the herd (of investors) is all running the same way.  So, it's natural that markets overshoot - as there is nothing more characteristic of "efficient" and "rational" markets than sheer unreasoning fear at the first whiff of bad news.

And no post of mine would be complete, I suppose, without a report of a sighting of that mythical financial instrument, the implicit guarantee.   Mythical in that the only guarantee that one can be reasonably certain about enforcing in court is one that is written down in carefully crafted legal language and signed by the guarantor before the loan goes bad. 

The FT article quotes a "banker" as saying:  "The question is whether this will spread to Abu Dhabi Inc and Qatar Inc." a banker said.   "If this shows that investors cannot trust an implicit government guarantee, we might see a wholesale credit repricing across the region".

You'll notice I've put the word banker within quotes. 

Just as I would if an individual claiming to be a chemist were explaining combustion by reference to phlogiston.

The fact that this chap seems to seriously believe in implicit guarantees calls into question (at least in my mind) the appropriateness of his calling himself a banker.