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Euro haircuts 'make Gulf writeoffs viable'

Dubai, October 27, 2011

Haircuts on Middle Eastern sovereign debt are now a possibility in any future restructuring, after the euro zone rescue deal made writedowns for private sector bond holders politically palatable, an executive at Franklin Templeton Investments said.

Renegotiations of sovereign-linked debt from the Gulf, such as Dubai World's $25 billion deal, have seen holders of public debt repaid in full and on time and bank creditors forced to shoulder extended tenors and unfavourable terms.

However, times have moved on and the new agreement struck on European debt, which will involve holders of Greek sovereign bonds taking a 50 percent writedown, will increase the chance of such action being part of future negotiations in the region.

"In 2008, politically it would have been very difficult or almost unacceptable to treat the private sector and bond holders harshly and give them haircuts," Mohieddine Kronfol, chief investment officer for Mena fixed income and global sukuk, told the Reuters Middle East Investment Summit.     

"Today the environment is different. If Greece is saying to people you have to take a 50 percent haircut, it gives the government in Abu Dhabi and Dubai the political leeway to come and say 'we both made a mistake, this project is not working out so let's share the pain'."     
While a number of government-linked restructurings in Dubai have been announced or completed, JP Morgan said earlier this month there were concerns about the ability of Jebel Ali Free Zone (Jafza) and DIFC Investments to meet 2012 maturities.

While Kronfol said there were no new restructurings on the horizon, these two entities would need support to meet the upcoming liabilities.
"They definitely need help and a lot of refinancing will be through local banks which are exposed to them," Kronfol said. "We expect they will give them the necessary support to pay these down."     

The premium which Mena names have to pay over similar-rated entities in the Western world when they tap the bond market is regarded as a bone of contention for many regional issuers. - Reuters




Tags: Dubai | DIFC | Jafza | euro | debt restructuring |

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