Beyond general information of the Funds, the portfolio reports offer a strategic overview on the latest performance.

The tables have turned: how to destroy a financial reputation

Last week, the state-owned company Dubai World (which has debts of around USD 59 billion) shocked the international markets by asking for a six-month repayment holiday, when it told its creditors to kindly wait until 30 May 2010 before exercising their claims. As we all know, Dubai World holding is the owner of the Dubai-based Nakheel corporation, the projects of which included the property development of the “Palm Islands”. Bonds issued by Nakheel were due to mature on 14 December this year, when domestic and international investors alike had unanimously expected the company to repay the price of the securities in full.

The situation was further exacerbated by the fact that, following the announcement, the US markets closed for Thanksgiving, while in the Muslim state of Dubai the Eid al-Adha (Festival of Sacrifice) is still underway. Together with the Eid Al-Fitr that follows the month of Ramadan, Eid al-Adha is the most important religious festival in the country. This means that on this year’s 49th week the equity markets of the United Arab Emirates were only open on the last day of November and the first day of December, and were only set to reopen on 6 December. By dawn on Tuesday the story had taken another turn, as Dubai World Holding announced the rescheduling of around USD 26 billion of its debts. The rescheduling applied exclusively to the holding’s companies known as Nakheel World and Limitless World. All of this is partly reassuring, since according to the announcement the financial situation of the remaining subsidiaries, including the world’s third largest dock operator, Dubai Ports World, continues to be stable. It was also mentioned that the rescheduling would be carried out in several stages, and that the Islam bonds (or sukuks) issued by Nakheel, accounted for USD 6 billion of the debts affected by the rescheduling. These events raised serious questions with regard to the emirate’s ability – and, more importantly, its willingness – to settle in full the debts of state-owned corporations on time in the future.

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Money-market opportunities in the immediate region

Since we entered the latest, current stage of the global financial crisis, in spring 2009, the money markets of the “Visegrád” group of nations (Czech Republic, Hungary, Poland, Slovakia) have taken on a distinct, shared feature. The whole “Central and Eastern European banking system”, partly due to the fact that banks in the individual countries tend to have the same owners, is working to reduce the ratio of loans to deposits, with the result that funds for short-term placement are constantly being generated. Governments – despite a marked increase in their financing requirements – are neither able nor willing to tie up these funds by issuing a higher volume of discount T-bills. This is because, firstly, they are attempting to limit issuances as best they can under the present circumstances, since they would prefer to delay any rise in ratio of state debt to GDP until next year; and secondly they are intent on seizing every opportunity to raise the average maturity of state debt. And as if all this weren’t enough, the central banks are implementing (or simply threatening) extraordinary intervention in order to increase the supply of liquidity and push down the money-market (less-than-oneyear, interbank) interest rates. The most aggressive was the Polish central bank, which pushed the maturity of active repos to 12 months, and bought securities issued by commercial banksat public auction.

All of this inevitably led to exceptionally low interbank rates in these markets. The interbank fixing rates (BUBOR, PRIBOR, WIBOR), however, present us with a slightly different picture. Since the interest-cutting cycle can be regarded as over in the Czech Republic and Poland, the curve of the interbank fixing rates starts out from the central-bank base rate, displaying an upward tendency at expiry. A downward trend is only observable in Hungary, a fact which is attributable to expectations of a continuation of the interest-cutting cycle. But the interbank fixing rates are the result of an interbank tender, a form of questionnaire, and no actual trading takes place at these levels. Since the banks could have a vested interest in maintaining higher fixing values, these rates typically do not reflect the actual interest levels in the money market, which is why they also show no trace of the abundant liquidity.

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