World share markets have slumped on fears a possible default by Dubai will cause other highly indebted countries to follow suit.
The surprise devaluation by Vietnam also surprised markets in Asia that were grappling with the news from Dubai.
European markets fell 3% after Dubai’s shock call to suspend the debt of a key state company fuelled anxiety about excessive public borrowing, analysts said.(See story below)
The London market fell 3.15%, its worst day’s fall since March and the depths of the slump.
Frankfurt sank 2.9% and Paris shed 3.28%.Europe’s Dow Jones Stoxx 600 Index fell 3.3% as the region’s markets weakened on the Dubai news.
New York markets were closed Thursday for the Thanksgiving Day holiday in the United States, but futures on the Standard & Poor’s 500 Index fell 2.2% in trading, indicating a possible 150 point fall in Friday’s half day trading session.
The Brazilian market dropped more than 2% in reaction as the cost of debt insurance soared, the US dollar turned up, gold rose, then fell and investors awaited reaction on Wall Street tonight.
Gold hit an all time high of $US,195 an ounce. The US dollar fell sharply against the yen (The Australian dollar also fell, dropping to around 91.30 US cents).
But as the day went on, gold retreated as the US dollar gained from worried investors seeking safety.
Shares in the London Stock Exchange fell because the Dubai Bourse holds a big stake; shares in Porsche and Daimler also fell in Germany because investors from the UAE hold big stakes.
Dubai World’s assets range from stakes in Las Vegas casino group, MGM Mirage, to the Standard Chartered Bank and New York luxury retailer Barneys.
In Asia, Shanghai nose dived 3.6%, Tokyo 0.6% and Hong Kong lost 1.7%. the Australian market also weakened.
Chinese shares were also hit by the prospect of tighter banking rules and worries about monetary policy next year.
Not helping in Asia was the devaluation of its currency by Vietnam, the third in two years.
Vietnam not only devalued its currency, but also lifted interest rates by 1% to try and choke off rising inflation.
The devaluation of the dong, was 5.4% and came as a complete surprise to markets and will help underpin the beleaguered currency.
In doing so, the country is the first in Asia to react to the pressures caused by the central government’s stimulus measures in the wake of the global crunch.
Other countries have talked about limiting hot capital inflows, Vietnam is the first to take the obvious and crude devaluation route.
The government reset the US dollar reference rate to 17,961 dong from its current level of 17,034 dong, according to reports.
According to Bloomberg, black market dealers have been trading the dollar at between 19,600 dong and 19,800 dong.
The central bank has also narrowed the trading band of the dollar against the dong to 3% from 5%.
The central bank will also raise its benchmark interest rate to 8% from 7% from December.
The dong has come under pressure recently as inflation started climbing and domestic demand, driven by the country’s $US8 billion stimulus package, drove the current account deficit to close to $US2 billion a month.
The ANZ Bank is one of the biggest Australian investors in Vietnam providing banking and securities services.
Vietnam’s inflation rate accelerated to 4.35% in November, up from 2.99% in October.
The dong fell 1.7% to 18,191 against the dollar yesterday. It earlier traded as low as 18,500, 3% weaker than the new reference rate.
The State Securities Commission of Vietnam ordered securities companies to restrict lending for stock investment, according to a statement on its Web site today.
The Southeast Asian nation is trying to sustain economic expansion in 2010, lower credit growth and meet economic targets, the central bank said yesterday.
The devaluation came a day after the State Bank of Vietnam ordered all banks and financiers to provide finance for business and production. By omission they were not to fund speculation.
It’s the most dramatic move yet from an Asian country.
Singapore introduced a modest devaluation in April when the Monetary Authority (the country’s central bank) effectively allowed the currency to float downwards by widening its intervention bank.
The MAS has maintained that stance since.
There has been considerable comment on the way China is maintaining the Yuan’s value at a low level by linking it to the weakening US dollar, effectively setting up a dirty devaluation.
Japan has criticised the Chinese policy with increasing passion because the damage it is doing to Japanese exports and the yen, which fell to under 87 to the US dollar yesterday.
That was the Yen’s highest level against the greenback since July 1995.
China’s currency has remained around 6.83 per dollar since July 2008 and has followed the 8.1% fall in the US dollar index (the six major currencies traded against the greenback) fall this year.
The US dollar has lost 7.4% of its value against the yen and 5.6% against the euro in the past three months.
Dubai scared global markets yesterday with a "standstill request’ for one of its biggest state-owned businesses that owes banks and others $US59 billion.
Dubai’s
