Banks, world leaders play down Dubai debt threat

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

But the numbers pale in comparison to the USD 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 down over 3 percent.

"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.

"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 has at least 8-9 billion dirhams (USD 2.2-USD 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 has at least 5 billion dirhams (USD 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, Europe's biggest bank and the one with more loan exposure to the UAE than any other at around USD 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."