Dubai's debt default risk below American states

Dubai's 5-year CDS has dropped by more than 50% since peaking February 2010

In a resounding proof of the recent surge in Dubai's economic prospects, the chances of the UAE's second largest emirate defaulting on its sovereign debt fell to less than one in five yesterday, according to CMAVision's Sovereign Risk Monitor.

At the same time, CMA data showed that the American states of Illinois and California were ranked among the 10 highest default probabilities in the world, at 7th and 9th place, respectively, and ahead of Iraq, which is ranked No. 10 in the world.

The cost of insuring five-year Dubai debt against default has plunged to below 300 basis points, and stood at 290.65bp on Monday, below not only certain European and regional economies, but also below that of some economies perceived to be more stable, such as India's and a couple of American states.

With the emirate's economic engine roaring back to life in 2011 and charging ahead full steam in 2012, Dubai's five-year credit default swaps (CDS) have now dropped by more than 50 per cent since peaking at 655bp in February 2010. Dubai, which once featured among the top 10 default probabilities, has been out of the list of riskiest sovereigns since the third quarter of 2011.

On the other hand, the State of Illinois has a default probability of
35.64 per cent, according to yesterday's CMA data, while California's default probability is only slightly lower at 34 per cent.

The world's riskiest nation, in terms of a probability of a default on its sovereign debt, is Greece (no surprises there), which has a 99.89 per cent chance of defaulting on its debt. It is followed by its European peer Cyprus, which has a 57.3 per cent chance of defaulting on its sovereign debt.

Argentina (49.87 per cent), Pakistan (43.28 per cent) and Venezuela
(41.45 per cent) comprise the world's top five riskiest nations in terms of a sovereign debt default, according to CMAVision's data.
Eastern European nations Ukraine (No. 6; default probability of 39.78 per cent) and Portugal (No. 8; 35.23 per cent) comprise the remaining among the world's top 10 default probabilities as of yesterday.

According to the latest available quarterly report, Dubai's cumulative probability of default is also below that of India (29.5 per cent).
India's proxy default risk stood at 381 basis points at the end of the second quarter of 2011.

Since peaking at 655bp in February 2010, Dubai's five-year CDS spread has shrunk considerably despite ongoing global economic uncertainty.

The emirate's real estate sector has seen its fiortunes turn around remarkably this year, with property prices surging back to boom-time levels in some in-demand Dubai residential communities.

The real estate sector's revival is also evident in the number of new projects being launched by property developers in Dubai, a sign that demand has definitely returned for quality projects and developments.

With an obvious improvement in the regional economy, intra-region investment flows are picking up once again, with Dubai being an obvious beneficiary. UAE's banks are now seen active in Dubai's property market again, with recent reports pointing to an uptick in bank lending and mortgages.

Improved bank liquidity conditions and a gradually declining inter-bank lending rate means that the country's financial institutions are once again flush with cash and are back in the business of offering loans, thanks to their comfortable capital adequacy levels.


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