Many banks play down exposure to Dubai debt
Stocks from Tokyo to London were haunted by concerns 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, where he will attend a summit of leaders from Commonwealth countries.
"The world financial system is stronger now and able to deal with the problems that arise," he said.
French Prime Minister Francois Fillon said there were enough resources in the region to make sure there would not be a second round of the financial crisis although at a joint news conference, Russian premier Vladimir Putin said the saga showed it would be tough for the world to shake off the financial crisis which has gripped it for 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 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 as a result of the global credit crisis.
"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.
French banks said their exposure to the Dubai crisis was limited and Italy's central bank said Italian banks should face no problems linked to the Gulf trade and tourism hub. The sentiments were echoed by Chinese banks.
Those statements helped push European stocks into the black although U.S. stock futures pointed lower after markets were shut for the U.S. Thanksgiving holiday.
"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."
ABU DHABI EXPOSURE
While European and Asian banks scrambled to distance themselves, lenders in Abu Dhabi, a fellow member of the UAE federation and home to most of the country's oil, appeared to have major positions.
Abu Dhabi Commercial Bank has at least 8-9 billion dirhams ($2.18-$2.45 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 has at least 5 billion dirhams ($1.36 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 with CDS spreads in Abu Dhabi increasing," it said in a note. "It remains unclear if the Dubai government will support the liabilities of government related entities and how ... neighbors will weather the storm."
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 $3.52 billion bond at the center of the crisis, which was originally due to mature on Dec 14, 2009, had traded as high as 110 on Wednesday before the Dubai government said it would ask creditors to agree on a standstill of debt held by Nakheel and Dubai World until May 2010.
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.
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 labor.
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.
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 also said the timing of the announcement on the eve of the holiday, the lack of prior communication with bondholders, and the scant details given on how a debt rescheduling would work had 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 the crisis or put a positive spin on the news on Friday. Abu Dhabi-based financial daily Alrroya Aleqtissadiya carried the headline "European markets overreact to Dubai's bond news."
Writing by Lin Noueihed, reporting by Raissa Kasolowsky, Martina Fuchs and Enji Kiwan in Dubai, Ulf Laessing in Saudi Arabia, Adrian Croft, Sujata Rao, Atul Prakash, Caroline Cohn in London and Michele Kambas, Editing by Mike Peacock
Copyright 2009 Thomson Reuters