No great Sheikhs

Bank exposures/Dubai: Dubai’s debt bombshell should not hurt overseas banks unduly. The request for a standstill on $59 billion of debt held by the government-owned Dubai World roiled global markets on November 26. Banks were especially hard hit. Shares in Barclays, which investors consider a significant player in the region, declined 8 per cent. But the sell-off seems more related to emotion than calculation.

Banks’ main exposure to Dubai World, whose Nakheel arm has been behind some of Dubai’s more outlandish property ventures, is via $13.6 billion of syndicated loans, according to JPMorgan. Royal Bank of Scotland, bookrunner for $2.3 billion, has the biggest exposure.

That sounds significant, but bookrunners tend to syndicate all but 10 percent of loans. That would leave RBS with $230 million exposure, but the actual loss from any default should be substantially less, after taking recoveries and hedges into account. Barclays, for example, originated a $1.8 billion facility to Nakheel but retained only $150 million, according to JPMorgan. The bank has pointedly not adjusted its loss guidance for 2009.

Of course, severe problems in Dubai might suggest other losses elsewhere in the United Arab Emirates. That would be a worry for the UAE’s biggest foreign lenders: HSBC and Standard Chartered, which had $17 billion and $7.8 billion of exposure respectively at the end of 2008. If those loans lost all value, the banks’ equity would drop by 18 and 43 per cent.

But nothing like that is likely to happen. Indeed, since the other main borrowing emirate in the UAE is oil-rich Abu Dhabi, any losses are likely to be minimal. Abu Dhabi is likely to continue to provide some support to Dubai - not least to avoid being tarred by the same brush in global markets. That would reduce the lenders’ pain.

The losses should be manageable, but some banks’ pride will take a severe blow. Many not only touted Dubai as a free-wheeling, low-tax future financial hub but set up ambitious operations there. Those plans now look foolish.