The government’s bank bailout could prevent Dubai’s debt crisis from sending credit markets back into deep freeze — but some say it shouldn’t.
Corporate lending won’t grind to a halt if Dubai defaults on its tens of billions in debt, sources said, because the US and British governments are acting as backstops.
“I think the fear would be the sort of Russian situation [in 1998], where they defaulted on their debt and triggered a much larger reaction,” Steven Smith, global head of leveraged lending and restructuring at UBS, told The Post.
Banks pulled back their lending dramatically in the wake of the Russian crisis. But today, for example, the British government has already taken ownership of RBS, which has deep exposure to state-owned Dubai World, and “a couple billion won’t bring the UK government down,” a source said.
Dubai World earlier said it wanted to restructure how it will repay $60 billion worth of debt coming due, and there are worries it will default on that and more.
Maria Boyazny, managing director at private equity firm Siguler Guff, who buys distressed assets around the world, said lenders believe governments will basically cover bad loans, giving them downside protection.
“This should be a big deal, but if it is not, it shows there is no moral hazard,” she said.
“In the next couple of years, Dubai-like events will keep hitting us,” she said. When the US government “pulls out the liquidity rug” — when it ends programs like Term Asset-Backed Securities Loan Facility, which is meant to help lenders extend credit — “things like Dubai will have a much bigger impact on the market.”
In a cautious environment, one of the first places from which banks will retreat is leveraged lending, Smith said. That would not only affect new loans, but also the thousands of American companies that owe $1.3 trillion in debt that is coming due in the next five years who are looking to push off their payments through refinancing.
Leveraged lending has just come back over the last six months, though not close to the level it was during the credit boom that ran from 2005 through 2007.