Publication date: 5 January 2010 | Covering: October – December 2009
Quarterly Briefing
- Dubai World: November 25 debt standstill request shocks markets; US$59bn of debt; Abu Dhabi provides rescue support; global sovereign risk spotlight
- Greece: December ratings downgrades begin; Fitch, S&P cut Greece to BBB; bond yields widen; first eurozone fiscal crisis signals
- US recession confirmed ended June 2009: NBER announces recovery underway; GDP returning to growth; unemployment still rising toward 10%
- Bernanke reappointed: Obama renominates Fed Chair; Senate confirmation; Fed signals rates near zero “for extended period”
- Copenhagen COP15: December climate summit produces non-binding accord; no enforceable targets; developing nations resist
- US housing: Tax credit extended to April 2010; home prices stabilise from early 2009 lows; Case-Shiller modest recovery
- Gold: Surges past US$1,200/oz for first time; dollar weakness; inflation hedge demand; commodity rally
- Jamaica: JDX negotiations underway; domestic debt restructuring preparing ground for IMF programme
Dubai World; Sovereign Risk Returns
Just as financial markets were congratulating themselves on navigating the worst of the global financial crisis, Dubai World’s request on 25 November for a standstill on approximately US$59 billion of debt obligations reminded investors that sovereign and quasi-sovereign leverage remained a critical vulnerability. Dubai’s state-linked investment and development conglomerate had built an extraordinary portfolio of trophy assets — including the Nakheel property developer responsible for the iconic palm-shaped islands — on a mountain of borrowed money during the pre-crisis boom. The request caught markets off guard during the Thanksgiving holiday period in the United States, and sparked a sharp risk-off response before Abu Dhabi’s subsequent provision of emergency support calmed fears of disorderly default. The episode was significant not only for Dubai itself but for what it presaged: a global spotlight on the fiscal sustainability of sovereigns and state-linked entities that had accumulated large debts during the cheap money years. Within weeks, attention would shift to Greece, whose budget deficit and debt statistics were being revised dramatically upward.
Greece Downgrades; Recovery Confirmed
December 2009 brought the first formal credit rating downgrades of Greece by major agencies, with Fitch and Standard & Poor’s cutting the country’s long-term sovereign rating, widening the spread between Greek and German government bonds and raising borrowing costs. The new Greek government had revised the fiscal deficit estimate from approximately 3.7% of GDP to nearly 13% — a revelation that fundamentally changed the market’s assessment of Greek fiscal sustainability. Meanwhile, in the United States, the National Bureau of Economic Research’s Business Cycle Dating Committee confirmed that the recession that began in December 2007 had ended in June 2009 — making it the longest recession in the post-World War II era. GDP was returning to growth, but unemployment continued to rise, peaking near 10% by October 2009. The Federal Reserve, with Ben Bernanke having been renominated by President Obama for a second term, kept the federal funds rate in the zero to 0.25% target range and committed to maintaining accommodative policy for an “extended period.”
Jamaica: JDX Preparations; Mortgage Conditions
Through the fourth quarter of 2009, the Golding administration in Jamaica was preparing the ground for what would become the Jamaica Debt Exchange — a voluntary domestic debt restructuring that would reduce coupon rates on government securities and extend maturities, cutting the fiscal interest burden and enabling an IMF programme. Negotiations with domestic creditors, including commercial banks, insurance companies, and pension funds, were proceeding confidentially. The JDX was successfully launched and completed in January 2010. Against this backdrop, Jamaica’s mortgage market continued to operate in a high interest rate environment, with commercial lenders’ rates reflecting both domestic monetary policy and fiscal uncertainty. The NHT remained the most affordable route to home ownership for Jamaican workers, with subsidised rates of 0%, 2%, and 4% well below commercial equivalents, and loan ceilings of J$6.5 million individual and J$13 million for joint applications.
Looking Ahead to Q1 2010
The new year opens with the JDX completing and an IMF programme application imminent — transformative for Jamaica’s fiscal and monetary outlook. Globally, the Dubai and Greece situations will test whether fiscal stress can be contained or spreads to other sovereigns. The US recovery’s durability, the Fed’s eventual exit from extraordinary accommodation, and China’s tightening cycle will be the dominant global themes for 2010.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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