U.S. banks can take comfort in the fact that their direct loan exposure in Dubai is minimal, especially now that the debt crisis there is looking like it might be worse than the government is letting on. Indirectly, though, any more turmoil in Dubai's economy will almost surely affect banks here, and perhaps even hinder a broader economic recovery.
Large U.S.-based institutions that had been counting on growth in the United Arab Emirates to help drive investment-banking revenue could find themselves competing for fewer, and smaller, deals there, industry analysts say. Property values in the U.S. could fall even further if Dubai's cash-strapped development arm is forced to sell off prized commercial real estate holdings here. And if the debt crisis worsens - and many expect it will - European banks with significant real estate exposure in Dubai could very well curtail their lending in the U.S.
"Funding for U.S. commercial real estate projects often comes from European banks," says Rich Conti, president of the Plasencia Group, a hotel asset-management and consulting firm in Tampa. "With Dubai restructuring its debt, we just won't see as much of that financing."
Dubai appeared to avert a major crisis late last year when its oil-rich neighbor, Abu Dhabi, came through with a $10 billion loan to help its government-controlled real estate conglomerate, Dubai World, pay down some of its substantial debt. Then reports surfaced in January that half of the $10 billion actually came from two banks - not the Abu Dhabi government, as Dubai first claimed - raising fresh questions about the true size of the debt and Dubai's ability to repay it. It was estimated in November that total debt owed by the Dubai government and its related entities was roughly $80 billion, but a report in January from the investment bank ESG-Hermes said that it could be as high as $170 billion.
According to the financial research firm CreditSights, U.S. banks are on the hook for about $10 billion of loans in the U.A.E., including Dubai, with Citigroup ($5.9 billion) and JPMorgan Chase ($2.5 billion) owning the bulk of the debt. European banks, led by the U.K.'s Standard Chartered, HSBC, Lloyds and Royal Bank of Scotland, have far greater exposure, having lent more than $87 billion in the U.A.E., according to CreditSights.
Still, with so much uncertainty over the size of Dubai's debt - which includes bonds, off-balance-sheet liabilities, capital-market debt and syndicated loans - analysts say it's hard to get a true handle on banks' exposure. "I don't think we know where all the bodies are buried," says Jeff Saut, the chief investment strategist at Raymond James. "We don't know the full extent of Dubai's debt."
A more immediate concern for U.S. banks is the crisis' potential impact on investment-banking activity. The U.A.E. is the top investment-banking market in the Middle East and by December, investment-banking revenues in the region had shrunk to $50 million, from $200 million six months earlier, according to the data-tracking firm Dealogic. Goldman Sachs, Morgan Stanley, JPMorgan Chase were the top fee-generating U.S. investment banks in the Middle East last year. "There's going to be much less prospect for big-ticket investment-banking deals out there," says David Butter, Middle Eastern Regional Director of Intelligence for the Economist Intelligence Unit.
Dubai World has several prominent U.S. real estate holdings, including the $8.5 billion CityCenter project in Las Vegas; the Mandarin Oriental hotels in New York and a 50 percent stake in the Fontainebleau resort in Miami. If Dubai sold any of the properties, some analysts worry that it could cause prices in the already fragile U.S. CRE market to plunge, further threatening borrowers' ability to repay or refinance their debt. And some U.S. developers are concerned that Dubai's debt issues could impact their ability to get financing for their projects, which are heavily reliant on loans from the same European banks that have heavy exposure in Dubai. Says Conti: "Dubai's debt issues are going to choke off potential proceeds coming back to the U.S."