Asian credit spreads tightened across the board on Monday after news that Dubai had received aid from Abu Dhabi to fund a bond redemption helped calm a market worried about the credit worthiness of government-supported debt. The Asia ex-Japan iTraxx investment-grade index fell by 2-3 basis points (bps) to 98/100, indicating narrowing spreads.
The index has fallen from a four-week high of 124/129 bps on November 27 when Dubai's debt problems shook financial markets. The Thomson Reuters Index of Asia emerging credit was quoted at 183.41 bps, down from a peak of near 197 bps during the Dubai credit crisis.
On Monday, Abu Dhabi stepped in to help Dubai with a $10 billion injection, of which $4.1 billion was allocated to troubled state-owned conglomerate Dubai World to pay immediate obligations. The move was the least expected of all options Dubai had on the table after requesting a standstill on $26 billion in Dubai World debt on November 25.
The latest news sparked a relief rally across markets perceived to have higher risk. Emerging Asian currencies, stocks and credits all strengthened as fears of a debt default receded. Many of the Asian borrowers in the dollar bond market are supported directly or implicitly by government guarantees and the Dubai crisis had sparked worries about the robustness of such backing.
But analysts say there was a low probability of a similar crisis in Asia. "In Asia, the quasi-sovereigns play a much more meaningful role in the context of the domestic economies as compared to a Nakheel which is all about property development," said Pradeep Mohinani, credit analyst with Nomura International. "The quasi-sovereigns in Asia are much more critical to their economies in comparison with Dubai," he said.
Markets have also largely ignored the financial woes of Greece, whose credit rating was cut by a notch to BBB-plus by Fitch Ratings, which blamed the European country's mounting debt and fiscal deterioration as the main reasons for the cut. Greece's 5-year sovereign credit default swaps are currently trading at around 201 basis points having widened from about 170 bps before the downgrade.
In comparison, the 5-year CDS for Indonesia, rated BB or 4 notches below Greece, trades around 197 basis points. Still, the Dubai crisis has underlined market worries about the extent of leverage in entities across the world. "Dubai was always a reminder of a lingering risk event overleveraged to invest in real estate and significant decline in asset value was what subprime was all about," said Glenn Maguire, economist at Societe Generale.
"What we have seen out of that is several institutions and sectors globally will have to deleverage. Indeed for many years to come, we will need to see governments and central banks step in to facilitate the deleveraging process." Credit markets are now awaiting the revival of new issue flows in January, when Philippines and Indonesia are expected to make global debt offerings.
Also in the queue is expected to be a rare global bond issue from Malaysia. Malaysia will issue a small international bond next year to part fund its budget deficit, Prime Minister Najib Razak told Reuters on Sunday. Debt investors are likely to ignore the gaping budget deficit, expected to hit 7.7 percent of GDP this year. "The external side of the country's balance sheet remains strong. A bond issue by the sovereign would likely be received by the market," said Nomura's Mohinani.