Barclays Plc won the sheikdom’s first foreclosure cases in court, clearing the way for lenders holding about $16 billion of Dubai home loans to take action when borrowers don’t pay. Islamic lender Tamweel PJSC, the emirate’s biggest mortgage bank, has several of its own foreclosure claims pending and estimates about 3 percent of its mortgages are in default.

“Banks will be more aggressive in pursuing legal action if they see the process is efficient,” said Dubai-based Antoine Yacoub, a banking analyst at Moody’s Investors Service Inc. “They were trying to avoid the courts and restructure most of their loans, but once they see a precedent has been set, they will be encouraged to push more cases through.”

The successful foreclosures by London-based Barclays may open the floodgates in Dubai’s property market, which went from the world’s best in 2008 to the worst after credit dried up and speculators who had fueled price increases left the market, according to Deutsche Bank AG. Moody’s estimated in September that 12 percent of the 27,000 residential mortgages in the sheikdom would default within 12 to 18 months.

Now we are all eagerly awaiting the inevitable bailout with royal decree that mortgage owners in Dubai are not allowed to foreclose.

Given debt default is illegal in Dubai and you can go to prison for a check-bounce, it isn’t surprising that expats who intend to default just run away back home, leaving behind cars in the airport parking lot. Of course there are unlucky souls like in the Dark Side of Dubai (my earlier post) who get caught and have to spend a lot of time in the aforesaid parking lot.

Henry Blodget thinks the opening Burj in Dubai is the sign of the top, quoting the Economist which says :

THE opening of the Burj Khalifa, the world’s tallest building, in Dubai on January 4th had symbolic as well as architectural significance. Skyscrapers have long been associated with the ends of financial booms. The Empire State Building opened in 1931, two years after the Wall Street crash. The Petronas towers in Kuala Lumpur were unveiled in 1998, in the depths of the Asian crisis. Such towers are commissioned when money is cheap and optimism about economic growth is at its height; they are often finished when the champagne has gone flat.

How does this affect India? The remittance scare isn’t a big deal, but Dubai has a lot of Indian expats and for them, it must be scary to watch as a 160 storey tower battles with an ongoing recession about who’s casting the bigger shadow.

This post is written by Deepak Shenoy, at Capital Mind.

India, the world’s top recipient of migrant remittances, is examining the effect Dubai’s attempt to delay debt repayments may have on Asia’s third-largest economy, central bank Governor Duvvuri Subbarao said.

About 4.5 million Indians live and work in the Gulf region and remit more than $10 billion annually, according to government data. The turmoil may affect remittances, said Thomas Issac, finance minister of the southern state of Kerala, which accounted for about a quarter India’s migrant labor in 2005.

Dubai World, the emirate’s investment company, roiled markets as it sought a “standstill” agreement to delay repayment on much of its $59 billion of debt. Dubai suffered the world’s steepest property slump in the global recession, with home prices dropping 50 percent from their 2008 peak, according to Deutsche Bank AG. Most Indian migrant workers are employed in the Gulf’s construction industry, according to the government.

“It’s quite likely that Dubai will face a severe downturn in the real estate and financial sectors and that will affect remittances and jobs,” Issac said in an interview at his office in Thiruvananthapuram yesterday.

Remittances from the Middle East account for about 25 percent of Kerala’s economy, Issac said. India received $52 billion of remittances last year, according to the World Bank, making it the world’s largest recipient of money from migrant workers. China got $49 billion.

Turns out remittances haven't dropped much, yet. World Bank estimates that overseas Indians will remit $47 billion back to India this year. (November data)

(Click for a larger image)

We're down about 4 billion for the year, from 2008's record $52B. That's not much of a fall. Dubai can't be much impact, honestly - Dubai's total debt is $80B and Indian migrant workers, especially those in the construction area, are probably the lowest paid in the lot.

There's some exposure to Dubai by various firms, like L&T's $25 million receivables, or Bank of Baroda's 4,000 cr. loans. (more here) But the exposure to Dubai World is stated to be really low; yet, since DW is just a holding company, the repurcussions of a default may take time to realize. Still, it's a little late to start worrying about remittance drops; all we can do in India is check corporate exposure - and that seems to be what D. Subbarao really meant.

This post is written by Deepak Shenoy, at The Indian Investor's Blog.

Knickers, unfortunately, have the propensity to get into twists just when such statements are made.

Both S&P and Moody's say they might consider this a "default"; that may have some implication on debt protection contracts, which essentially help if the original loan taker defaults. Such contracts, or Credit Default Swaps, soared in price - from 1.21% to nearly 5%. This may sound like a lot, and all news sites talk about it like its the new armageddon - but when the bugger is about to default, getting 100% protection by paying only 5% looks like a steal. And of course, some of these contracts were at 12% during the credit crisis last year, so yeah, big frikking deal.

Now they haven't yet defaulted - they've only decided to not pay the interest (which should be about $1 bn) and the principal (about $3.53 bn). See Zero Hedge for a pretty impressive Bank Of America coverage on the total loans and impact.

Not paying interest for a while, usually, is a standard way to do renegotiation. When you don't have the money, and you owe lots of it, you can threaten to default and the lenders will come to talk to you about how they can delay, change or reduce the payments. Unfortunately it doesn't work just as well when you default on your Rs. 10,000 credit card bill; otherwise we'd all be doing it. You gotta borrow through your nose, and make it someone else's problem more than yours.

Now Dubai World is an independent entity, and its default does not constitute a default by the Dubai government. That isn't obvious to everyone just yet, as evidenced by the panic in the markets there. Abu Dhabi, the rich neighbour, has just bought $5bn of Dubai's bonds, but under the condition that Dubai World gets none of it, until the debt situation there is sorted out.

To understand the scale of operations that Dubai went through, check "Dubai: The City on Crack". Incredible photographs of what is perhaps the world's greatest flauntable real estate investment, and therefore the world's greatest real estate bust. (Coming soon to a theatre near you: China)

The world markets tanked, even though the news was just before the long Id weekend in the middle east, and the Thanksgiving weekend in the US. India opened down 2% and went down 3.5% before recovering and closing a meager 1.5% - the Nifty's now at 4940 and the Sensex at 16,632. At

Is this the beginning of the end? Well, the amounts are not very high - $12 billion is hardly an earth shattering figure; it's about 55,000 crore rupees, and will not involve a substantial loss to anyone that has seen the spectre of Lehman and Bear Stearns unravel. The most impact seems to be on RBS, HSBC and Standard Chartered, but the total exposure pales in comparison with the looming $430 billion in CRE losses in the US.

Secondly, the amount is small enough for the other Arab emirates to come to Dubai's rescue and wiggle out other concessions. But any rescue is short-lived, because those crazy investments need to see buyers and generate cash flow to actually return the money - otherwise, it's just throwing bad money after worse. And while Dubai World's issues don't technically imply a problem with Dubai itself, the fear is that the other state controlled entities, all of which run fairly big debt-heavy balance sheets, will also threaten to default. And that, they say, could be an impact greater than $80bn - still small in comparison with the US, but remember Dubai is the size of a wart on the US's Backside.

When all markets are down, only two things can be the case:

• a) There's unnecessary panic. Things will go back to normal soon, everything works out, and things are just temporarily blown out of proportion.
• b) Market players know more than the rest of us, and are getting out before the shit hits the fan.

But b) is more evident in a real crisis. In October 2008, markets were going down slowly befoer the big crash (nearly all of the first few weeks of October last year, post Lehman, was steady, small drops, until that big drop on one day). In Jan 2008, nearly all momentum indicators showed bearishness BEFORE the crash - and given that such indicators usually lag markets, the drop was after a reasonable bout of bearishness.

Which one is it this time? Perhaps it's the fear of more defaults by different countries that is triggering some level of panic. And how true that turns out to be, is something only time will tell. I'll be looking; watch this space.

This post is written by Deepak Shenoy, at The Indian Investor's Blog.