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Dubai rushes to ease debt default fears
Updated: 2009-11-27 15:50

Dubai rushes to ease debt default fears
Dubai's stock market is closed on the first day of the long Eid al-Ad holiday in Dubai, November 26, 2009. [Agencies]

Dubai struggles to ease debt default fears

DUBAI/LONDON: Dubai struggled to ease fears of debt default on Thursday after its move to delay repayments at two flagship firms shook confidence in the Middle East as a centre for investment and a source of capital.

Dubai's debt problems, a hangover from a property boom that produced the world's tallest building, have shaken trust among Western investors who turned to the oil-exporting Gulf region for help during the global financial crisis.

The emirate shook the financial world on Wednesday when it said it would ask creditors of Dubai World, the conglomerate behind its rapid expansion, and Nakheel, builder of its palm-shaped islands, to agree to a standstill on billions of dollars of debt as a first step towards restructuring.

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State-run Dubai World had $59 billion of liabilities as of August, a large proportion of Dubai's total debt of $80 billion.

Dubai tried to revive confidence by saying on Thursday its profitable DP World, which runs 49 ports around the world, would not be involved in the restructuring. DP World, which has $3.25 billion outstanding bonds, is majority owned by Dubai World but has shares listed on NASDAQDubai.

"It might be a move to distinguish the solvent from less solvent companies in an attempt to shift the weight away from the less exposed entities," said John Sfakianakis, chief economist at Saudi Fransi bank.

But European bank shares, which had recovered in recent months on hopes that the worst of a global crisis was over, fell to lows not seen since May.

There was no immediate sign that US banks were exposed, although checks were difficult to make given Thursday's Thanksgiving holiday.

The Dubai news sent a fresh shudder through emerging markets. Stock markets around the world sank, with weakness extending to Latin America, where the Mexican peso was knocked off a 1-year high and Brazilian assets sank.

"If this eventually becomes an issue that affects the banks, once again it will put in doubt their capacity to start lending, which is a key factor in all the strategies to reactivate economies," said Carlos Ponce, head of equity strategy at brokerage IXE in Mexico City.

The US dollar edged up from 14-year lows against the yen as renewed risk aversion prompted investors to shed riskier assets.

"Spreads on a lot of fixed income products have gotten to very rich levels and the Dubai default will force risk to get repriced downward" when US markets reopen on Friday, said Andrew Brenner, at Guggenheim Securities. "Either way, look for a flight to quality scenario tomorrow on a holiday-shortened day."

Exposure to Dubai World could be as high as $12 billion in syndicated and bilateral loans, including existing loans for Nakheel and Istithmar, an investment arm of Dubai's government, banking sources told Thomson Reuters LPC.

A senior Dubai financial official said he understood markets' worries.

"However we have had to intervene because of the need to take decisive action to address (Dubai World's) particular debt burden," Sheikh Ahmed bin Saeed al-Maktoum, chairman of Dubai's Supreme Fiscal Committee, said in a statement.

Very Serious

In one of the first signs that Dubai's problems could hurt global fund-raising efforts for its neighbours, Saudi-backed Gulf International Bank pulled a bond sale due to price this week.

Dubai's move will likely lead to a reassessment of the riskiness of debt issued by the region's sovereign-linked firms.

Ratings agency Standard & Poor's said on Thursday it had placed the ratings of four Dubai-based banks on negative outlook due to their exposure to Dubai World.

S&P's and Moody's Investors Service had already severely downgraded several government-related entities on Wednesday.

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