The dollar and the yen roared higher Friday as the fallout from the Dubai debacle continued to resonate through global financial markets. Proving that gold doesn't always benefit during bouts of risk aversion, gold fell 4% along with a decline in crude oil and a drop in equities.
Meanwhile, equities markets across Asia fell sharply Friday. Japan's Nikkei 225 Average fell 3.2% to 9081.52, its lowest close since July. In Hong Kong the Hang Seng Index plunged 4.8% or 1075 points to 21134.50, led down by banking stocks. HSBC Holdings shares in Hong Kong fell 7.6% and Standard Chartered shares closed down 8.6% on news the banks were directly exposed to Dubai's debt problems.
European shares, which droped sharply Thursday, rebounded from early session lows Friday ahead of the U.S. stock market open, suggesting that the selloff on Dubai World's debt worries was overdone. The U.S. stock market is reopening Friday after the Thanksgiving holiday on Thursday. (See complete markets updates at WSJ.com/markets.)
A Wednesday announcement of a six-month standstill in debt payments took investors and analysts by surprise. It followed months of positive moves and comments from government officials suggesting Dubai and the federal government of the United Arab Emirates were willing to step in to plug financing holes.
"The most negative effect of [the] announcement is a major shock to confidence in the U.A.E. and the region more generally," said Richard Fox, a credit analyst at Fitch Ratings in London. "People will now question government support."
Amid a scramble by international bankers and analysts to assess global exposure to Dubai, the company said Thursday that its cash-generating ports division, DP World, wouldn't be included in the restructuring.
Company executives and representatives didn't respond to requests for comment. Sheik Ahmed bin Saeed al Maktoum, head of Dubai's finance committee, said in a statement Thursday that "our intervention in Dubai World was carefully planned and reflects its specific financial position," according to Zawya Dow Jones. "We understand the concerns of the market and the creditors in particular. However, we have had to intervene because of the need to take decisive action to address its particular debt burden," he said, promising more details next week.
Dubai's standstill request is one more troubling development for international banks, which turned in recent years to the oil-rich Middle East as a source of income. Both local and international banks also are licking their wounds from the debt troubles this year of two big family-run Saudi Arabian conglomerates, which owe more than 100 lenders a conservatively estimated $15 billion.
Dubai World is seeking a six-month moratorium on interest payments, a person familiar with the matter said. During that time, it could negotiate with creditors a restructuring that would pare liabilities, which include $20 billion of loans and bonds coming due in the next 18 months, according to estimates. If the lenders don't agree, Dubai World will default on the notes, the person said.
The banks with the greatest exposure to Dubai World are Abu Dhabi Commercial Bank and Emirate NBD PJSC, people familiar with the matter said. Executives at the two banks weren't available for comment Thursday.
Among the international banks that have large exposure are the U.K.'s Royal Bank of Scotland Group PLC, HSBC Holdings PLC, Barclays PLC, Lloyds Banking Group PLC, Standard Chartered PLC and ING Groep NV of the Netherlands, the person said.
RBS has lent roughly $1 billion to Dubai World, another person said.
Barclays's exposure to Dubai World is roughly $200 million, and that exposure is effectively hedged, according to people close to the matter.
Despite the surprise, people close to the banks said they still believe Dubai, or its neighboring emirate, Abu Dhabi, won't risk tarnishing their images further by leaving foreign creditors in the lurch, and will agree to a reasonable plan.
Standard & Poor's put four Dubai's banks on credit watch because of their exposure to Dubai World. The cost of insuring against a Dubai default rose to $547,000 a year per $10 million in debt from $318,000 on Tuesday, according to CMA, a credit-data provider.
Holders of a $3.5 billion sukuk, or Islamic bond, issued by Dubai World property subsidiary Nakheel, due next month, face the most immediate threat. Nakheel bonds dropped from about 110 cents on the dollar before the news Wednesday to about 70 cents.
Investors assumed that the cash coming from the United Arab Emirates would give Dubai ample ability to pay off the Nakheel bond, and Dubai also had sent signals that it was willing to support its corporate entities.
A problem now, observers said, is that the circumstances behind Dubai's moves are murky, making it hard to gauge the exact risk to the bonds and Dubai's own general creditworthiness.
"The uncertainty may drag on for some time yet, before we have a clear idea as to how issues will be resolved," said Huw Worthington, an analyst at Barclays Capital in London.
On Wednesday, the government of Dubai said in a statement that it appointed Deloitte LLP to spearhead an overhaul of the company, effectively sidelining current management. All year, Dubai World has been shedding jobs and cutting costs. That didn't appear enough for government officials.
A spokeswoman for the Dubai government's Department of Finance said on Wednesday that "the Dubai government decided it needed to take a more proactive role."
Dubai World Chairman Sultan Ahmed bin Sulayem would remain in place, she said.
Dubai World has served as Dubai's main driver of growth, operating a globe-spanning ports and transportation group and spearheading real-estate and infrastructure projects at home and abroad.
Real-estate subsidiary Nakheel built Dubai's iconic palm-tree-shaped island, packed with luxury villas and hotels, many still under construction. With little oil, Dubai financed much of this with debt.
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