Dubai debt fears remain focus in world markets-US, Emerging Market Stocks Slide as Bonds Advance on Dubai

Dubai will soon have the world's tallest building



The Atlantis launched last year with a party rumoured to cost $20m


New York Stock Exchange traders- As market drop 5%.

The Dubai skyline


A money trader work at a dealing room the U.S. dollar rate against Japanese yen on the Foreign Exchange Market in Tokyo, Japan, Friday, Nov. 27, 2009. The U.S. dollar fell to the 84 yen level Friday Morning.


A man walks in front of the electronic stock board of a securities firm in Tokyo, Japan, Friday, Nov. 27, 2009. The benchmark Nikkei 225 stock average fell 301.72 points, or 3.2 percent, to 9,081.52.


A man who shines shoes works in front of screens showing the Korea Composite Stock Price Index (KOSPI) and foreign currency rate, right, at the Korea Exchange Bank headquarters in Seoul, South Korea, Friday, Nov. 27, 2009. The KOSPI fell 75.17 points, or 4.70 percent, to close at 1,524.35 Friday.



A woman using mobile phone walks by an electronic stock board of a securities firm in Tokyo, Japan, Friday, Nov. 27, 2009. The benchmark Nikkei 225 stock average lost -169.73 points, to end morning session at 9213.51.


A man communicates with a phone in front of the electronic stock board of a securities firm in Tokyo, Japan, Friday, Nov. 27, 2009. The benchmark Nikkei 225 stock average lost -169.73 points, to end morning session at 9213.51


A money trader walks past a screen indicating the U.S. dollar rate against Japanese yen at the Foreign Exchange brokerage in Tokyo, Japan, Friday, Nov. 27, 2009.


A man looks at the electronic foreign exchange board of a securities firm in Tokyo, Japan, Friday, Nov. 27, 2009. The U.S. dollar fell to the 84 yen level Friday Morning.


A South Korean currency trader reacts in front of a screen showing the Korea Composite Stock Price Index (KOSPI) at the Korea Exchange Bank headquarters in Seoul, South Korea, Friday, Nov. 27, 2009. The KOSPI fell 75.17 points, or 4.70 percent, to close at 1,524.35 Friday.



Banks outside the Gulf played down their exposure to Dubai debt on Friday after fears of default shook global markets, and European leaders said the world economy was now strong enough to cope with the setback.

Stocks from Tokyo to New York were haunted by concern that banks were exposed to state companies in Dubai, whose rise from a desert backwater into the business hub of the world's top oil exporting area lured expatriate cash and executives.

The crisis began on Wednesday when Dubai, part of the United Arab Emirates federation, asked to delay payment on billions of dollars of debt issued by conglomerate Dubai World and its main property subsidiary Nakheel, developer of three palm shaped islands that once attracted celebrities and the super-rich.

"While it is a setback, I think we will find it is not on the scale of previous problems we have dealt with," British Prime Minister Brown told reporters in Port of Spain.

"The world financial system is stronger now and able to deal with the problems that arise."

French Prime Minister Francois Fillon said the Gulf had the resources to ensure the world would not sink into a second round of turmoil, but Russian premier Vladimir Putin said the saga showed how hard it is to shake off a crisis that has lasted two years.

Dubai World had $59 billion of liabilities as of August, most of Dubai's total debt of $80 billion. International banks' exposure related to Dubai World could reach $12 billion in syndicated and bilateral loans, banking sources told Thomson Reuters LPC.

But the numbers pale in comparison to the $2.8 trillion in writedowns the International Monetary Fund estimates U.S. and European lenders will have made between 2007 and 2010.

"The events in Dubai in recent days are one of the hiccups if you like, one of the difficulties, which affirms that we were right to highlight the uncertainty ahead of us and that the road ahead could be a bumpy one," European Central Bank Governing Council member Athanasios Orphanides said.

Analysts expect Dubai to receive financial support from Abu Dhabi, though it may have to abandon an economic model focused on developing swathes of desert with foreign money and labour.

But the prospect of a bailout did little to allay concerns among investors, already worried the global economy may not be recovering quickly enough to justify a near doubling of prices for emerging market stocks and many commodities since March.



Wall Street, which was closed on Thursday for the U.S. Thanksgiving holiday, opened sharply lower on Friday over fears of renewed financial turmoil. Banks with Gulf investors were badly hit, with Citigroup (C.N) down over 3 percent. [ID:nN27341479]

"Dubai is deeply connected with the global community and people are worried about a domino effect with other points of the financial system," said Kevin Caron, U.S.-based market strategist at Stifel, Nicolaus & Co.

BANK EXPOSURE

European and Asian banks scrambled to distance themselves from problems in the Gulf trade and tourism hub, helping European stocks reverse earlier losses and hit session highs as the market reassessed the significance of Dubai's problems.[.EU]

"We have seen a classic risk aversion reaction in the markets over the past 24 hours. The dollar has slumped, the yen is stronger," a Societe Generale note said. "At this stage, this setback looks to be one that is very much country specific."

Lenders in Abu Dhabi, a fellow member of the UAE and home to most of its oil, have lent heavily to Dubai and could suffer.

Abu Dhabi Commercial Bank ADCB.AD has at least 8-9 billion dirhams ($2.2-$2.5 billion) exposure to Dubai World and related entities, forcing the bank to book more provisions, a senior executive of the bank said. First Gulf Bank FGB.AD has at least 5 billion dirhams ($1.4 billion).

JP Morgan said it was less concerned about global banks' direct exposure to Dubai World and was not worried about Abu Dhabi, which is sitting on hundreds of billions of dollars.

"We are more concerned about the spillover effect within the UAE," it said in a note. "It remains unclear if the Dubai government will support the liabilities of government related entities."

The price of insuring Gulf debt surged again on Friday.

Credit default swaps (CDS) for Dubai rose more than 100 basis points but were well below previous peaks in the global crisis late last year and earlier this.


Nakheel's Islamic bond prices extended losses, falling 30 points to a record low of 40, according to Reuters data.

The debt crisis in Dubai also pushed up debt insurance costs for other sovereigns in the Gulf, a wealthy region Western firms had turned to for help at the height of the credit crunch, and at some major U.S. banks.

TRANSPARENCY, CREDIBILITY

International fund managers said they were considering rotating dedicated money out of Dubai and into Abu Dhabi, Qatar and Egypt after local markets begin to open on Monday after the Muslim Eid al-Adha holiday.

Analysts said the timing of the news on the eve of the holiday, the lack of prior communication with investors, and the scant details given on the plans dented Dubai's credibility.

"The way the announcement was made, including its timing has caused damage to Dubai's credibility," Ghanem Nuseibah, senior analyst at Political Capital Policy Research & Consulting Institute. "This will take a very long time to repair."

UAE media either ignored or put a positive spin on the news. Abu Dhabi-based financial daily Alrroya Aleqtissadiya carried the headline "European markets overreact to Dubai's bond news".

But HSBC (HSBA.L), Europe's biggest bank and the one with more loan exposure to the UAE than any other at around $15.9 billion, said it was not concerned.

"It's... a high potential part of HSBC's international business mix and a region we are completely committed to," Michael Geoghegan, HSBC CEO, said.

"I am confident that the leadership of Dubai and the UAE will overcome any short-term issues they face, which appear to have been somewhat sensationalised."


World Economy concerns about Dubai debts remains.

European stock markets regained their poise Friday after Wall Street didn't fall as much as feared on the news earlier this week that Dubai is having trouble handling its debt.

Because U.S. markets were closed for Thanksgiving Day on Thursday, they are only reacting now to the fears that Dubai's debt problems may affect the wider financial system.

In Europe, the FTSE 100 index of leading British shares was up 41.30 points, or 0.8 percent, at 5,235.43 while Germany's DAX rose 50 points, or 0.9 percent, at 5,669.84. The CAC-40 in France was 36.85 points, or 1 percent, higher at 3,716.08.

On Wall Street, the Dow Jones industrial average was down 162.71 points, or 1.6 percent, at 10,301.69 soon after the open while the broader Standard & Poor's 500 index fell 19.33 points, or 1.7 percent, at 1,091.30.

Though hefty, the losses in the U.S. paled in comparison to those posted earlier in Asia, when indexes in Hong Kong and South Korea tumbled 5 percent in response to the previous day's Dubai-related losses in Europe.

Confidence about the world economy has been hit hard by the news that Dubai World, a government investment company with around $60 billion worth of debt, has asked creditors if it can postpone forthcoming payments until May. Investors are wondering whether the current uncertainty surrounding the emirate has brought the eight-month equities bull run to an end.

Analysts said more clarity about the long-term impact of Dubai's troubles would likely emerge next week, when Wall Street is back to normal trading hours following the Thanksgiving Day holiday. U.S. markets are only open for half the day Friday.

"It is likely to take at least a few days before the implications of the impact of a possible default from Dubai are properly digested but for the present it seems that the market is seeing this negative news as a blow to the global recovery but not one that will push it off course," said Jane Foley, research director at Forex.com.

Investors were also keeping a close eye on associated developments in the currency markets after the dollar slid to a new 14-year low of 84.81 yen.

However, the dollar climbed back off its lows to 86.74 yen amid mounting expectations that the Bank of Japan may intervene in the markets by buying dollars or selling yen after Japan's finance minister Hirohisa Fujii said he was "extremely nervous" about the movements in the yen and that the "market had moved too far in one direction."

On Thursday, the Swiss National Bank reportedly intervened to buy dollars to prevent the export-sapping appreciation of the Swiss franc. That seems to have worked — for now, at least — as the dollar has moved back above parity, trading 0.9 percent higher at 1.0118 Swiss francs.

The British pound has also been battered amid fears about the exposure of Britain's banks to the region. The pound was down nearly one percent earlier but recovered some ground to be trading only 0.3 percent lower at $1.6475.

Another currency struggling somewhat in the current climate was the euro, which fell 0.5 percent to $1.4943 — in times of uncertainty the dollar is considered to be more of a safe haven currency. Investors are also concerned about the exposure of European banks to Dubai.

Earlier, Asian stocks were particularly badly hit as they played catch-up following the big losses in Europe in the previous session. Hong Kong's Hang Seng closed 1,075.91 points, or 4.8 percent, lower at 21,134.50, while South Korea's benchmark plummeted 4.7 percent to 1,524.50.

Elsewhere in Asia, Japan's Nikkei 225 stock average fell 3.2 percent to 9,081.52 while Australia's index dropped 2.9 percent. China's main Shanghai stock measure was off 2.4 percent.

Indexes in emerging markets have so far avoided a second day of heavy losses, with Russia and Brazil down about 1 percent.

Oil, meanwhile, tracked developments in stock markets and benchmark crude for January delivery fell $3.30 to $74.66 a barrel in electronic trading on the New York Mercantile Exchange.


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