Dubai crisis won’t derail recovery, say leaders

Dubai crisis won’t derail recovery, say leaders

Major banks also play down their exposure to debt, but analysts warn of repercussions

London - World leaders have expressed confidence in the global economic recovery despite fears about a debt default by Gulf emirate Dubai, while major banks have played down their exposure to the debt.

Last Friday, 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.

United States markets closed lower last Friday , with the Dow losing 1.5 per cent to 10,309.92 points. The market regained its poise after European markets clawed back some of last Thursday’s horrendous losses to close about 1 per cent higher.

Asian markets slumped 3 per cent to 4 per cent across the board last Friday.

Since then, the ruler of the once-booming city-state has been to neighbouring Abu Dhabi, whose balance sheets are flush with oil revenue.

Abu Dhabi has the cash and cachet to be Dubai’s white knight providing a Gulf version of a too-big-to-fail bailout or helping to calm markets with promises to intervene if Dubai’s fiscal mess deepens.

The direction Abu Dhabi takes will likely set the tone for the coming week as analysts try to sort out which banks and institutions have the most at stake in the money crunch - which has suddenly transformed Dubai’s image from a desert dream factory of indoor ski slopes and a ’seven-star’ hotel to a reckless spender sideswiped by the recession and unable to pay its bills.

The crisis began last Wednesday when Dubai, part of the United Arab Emirates (UAE) 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 Gordon Brown told reporters from the Commonwealth Heads of Government Meeting 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 was to shake off a crisis that has lasted two years.

The US said its Treasury Department was closely monitoring the situation in Dubai.

Although there were expectations that Abu Dhabi would come to Dubai’s rescue, Reuters quoted an unnamed senior Abu Dhabi official yesterday as saying that the capital of the UAE would ‘pick and choose’ how to assist its debt-laden neighbour.

‘We will look at Dubai’s commitments and approach them on a case-by-case basis,’ the official said. ‘It does not mean that Abu Dhabi will underwrite all of their debts.’

Despite the world leaders’ reassurances, analysts around the world warned that Dubai’s debt woes may worsen to become a ‘major sovereign default’ that roils developing nations and cuts off capital flows to emerging markets, Bank of America strategists said.

A default would lead to a ’sudden stop of capital flows into emerging markets’ and be a ‘major step back’ in the recovery from the global financial crisis, they wrote.

UBS analysts said Dubai may owe more than the US$80 billion (S$110 billion) to US$90 billion in liabilities assumed by investors.

Reuters, Bloomberg

Source : Straits - 29 November 2009

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