U.S. banks, including Citigroup (NYSE: C), Bank of America (NYSE: BAC), JP Morgan Chase (NYSE: JPM), will avoid a major hit stemming from Dubai’s debt problems, because they have a lot less direct exposure than what European banks do and less than what was originally feared.
There are still some potential issues that will linger from Dubai’s collapse. Market confidence around the world is still fragile because of the severity of the global recession, and it’s unclear what countries and institutions will face the worst hit from Dubai’s collapse and whether or not investment banking revenue will take a significant hit.
European markets took a significant hit on Wednesday, but the New York Stock Exchange remained relatively quiet, indicating that investors may not be terribly concerned about the Arab state’s financial problems in paying off at least part of its debt.
U.S. banks are not out of the clear yet. There might not be significant risk related on bonds or loans held on bank’s balance sheets, but as Bank of America Merill Lynch’s emerging markets research team said in a report, “The markets are still not digesting this corporate debt crisis very well. There is indeed evidence of clear contagion effects with basically all risky assets.”
The amount of Dubai’s debt that will become mature which needs to be refinanced in the short term is relatively low, and U.S. banks exposure to that debt is only a small fraction of that debt that needs to be refinanced. Out of the $60 billion in debt that Dubai World has, less than $10 billion needs to be refinanced by the end of the first quarter. Some analysts predict that the company’s debt could be as high as $80 or $90 billion because of potential liabilities that are not included in its balance sheet.
