Global share markets plunged late last week, losing an estimated $48.1 trillion, after the government-controlled conglomerate Dubai World announced that it would seek a six-month reprieve on its $59bn in debts, obligations amassed during years of a building spree that turned the desert emirate into the Middle Eastern version of Las Vegas, Wall Street and, at times, Sodom and Gomorrah, all rolled into one.
A pledge yesterday from the central bank of the United Arab Emirates that it will stand behind local and foreign banks did little to eliminate investor concerns about a possible default by the Persian Gulf city state.
A top financial official from the city state said Dubai World’s debt is not guaranteed by the emirate’s government, offering little direction to anxious investors on a day when the United Arab Emirates registered a record fall on the back of Dubai’s debt mess.
On the first day of trading since news of Dubai World’s debt crunch became public, Abu Dhabi’s ADX General Index sank by 8.3%, the most since May 2006. The Dubai Financial Market General Index tumbled 7.3 %, the most in a year. Gulf financial markets were closed late last week for the Eid Al Adha holiday.
“Dubai World was established as an independent company, it is true that the government is the owner, but given that the company has various activities and is exposed to various types of risks, the decision, since its establishment, has been that the company is not guaranteed by the (Dubai) government,” Abdulrahman al-Saleh, director general of Dubai’s Finance Department, said on Dubai TV.
Though most markets have managed to stabilise, there are still concerns that Dubai’s problems may be a harbinger of things to come.
“It is a warning sign that sovereign credit risks are likely to remain a problem – Ireland, Greece and Britain, for example – and the deterioration in budget deficits and debt/GDP ratios will remain a key feature for some time,” said Neil Mackinnon, global strategist at VTB Capital.
The blow to confidence caused by the Dubai situation was felt in the UK banking sector where shares in Royal Bank of Scotland and Lloyds Banking Group notched up substantial losses.
Lloyds, which is currently attempting to raise £13.5bn from shareholders, also suffered after Deutsche Bank cut its price target to 70p from 115p and said fears remained over a double dip in the economy.
Lloyds shares were 3.45p lower at 55.15p, while Royal Bank dropped 1.545p to 33.18p.
Other shares hit by fallout from the Gulf debacle included London Stock Exchange, which is 22% owned by Borse Dubai. LSE stock dropped 23.5p to 752.5p.
An uncertain opening on the New York market added to the concerns in London, with the FTSE-100 Index closing down 55.1 points at 5190.7.
Germany’s DAX ended 59.66 points, or 1.1%, lower at 5625.95. The CAC-40 in France was 41.30 points, or 1.1%, down at 3680.15.
Asian markets, meanwhile, rebounded yesterday after taking a tumble last week. Japan’s Nikkei 225 stock average climbed 264.03 points, or 2.9%, to 9345.55. Hong Kong’s Hang Seng added 687.00 points, or 3.3%, to 21,821.50 and South Korea’s Kospi gained 2% to 1555.60.
