DUBAI INVESTORS PANIC

Dubai's leader tried to calm panicky investors Tuesday as regional markets tumbled for a second day on news that the city-state's chief conglomerate needs to delay payments on its $60 billion debt for six months.

Government-owned investment company Dubai World — the United Arab Emirates' main engine of growth — gave anxious investors the first bit of clarity they were hoping for on how it might meet its debt obligations. It said it had begun discussions with creditors on $26 billion of its debt that would include restructuring about $6 billion.

The conglomerate is involved in international projects from Gulf banks and ports in 50 countries to luxury retailer Barney's New York and a grandiose six-tower hotel-entertainment complex in Las Vegas. Its potential for a debt default sent jitters through world markets on concerns of new setbacks for Dubai World's large international bank creditors just as they are recovering from the global financial crisis.

Dubai is one of seven highly autonomous statelets that make up the United Arab Emirates and the crisis has sent the UAE's two biggest markets into a tailspin. The Dubai Financial Market sank another 5.61 percent on Tuesday after plunging 7.3 percent on Monday and Abu Dhabi's bourse closed down 3.57 percent following an 8 percent slide a day earlier.

Dubai's ruler, Sheik Mohammed bin Rashid Al Maktoum, tried to reassure investors in his first public statement about Dubai World's debt crisis.

"Our economy is strong and solid and consistent," he told Al-Arabiya satellite television, adding markets were overreacting because of "a lack of understanding about what is happening in Dubai." He did not elaborate.

UAE President Sheik Khalifa bin Zayed Al Nahyan also maintained his country's economy was healthy.

However, analysts say Dubai World's debt crisis is a symptom of a broader malaise in the city-state. Dubai has no oil resources. But for the past decade, it has been the freewheeling boomtown, racking up debt as it built extravagant artificial residential islands, malls complete with indoor ski slopes and the world's tallest tower.

The troubles raised concerns in international markets that the large international banks that extended credit to the conglomerate could now face a new setback if it defaults just as those big banks are starting to emerge from the global financial crisis. The big fear is that Dubai's problems could be indicative that the global recovery is not on as solid a footing as many had hoped and there could be other toxic debt problems still to come in developing countries.

World stock markets rose sharply Tuesday on the announcement that Dubai World was in talks to restructure a large chunk of its business. Investors were eagerly awaiting clarity on how it would deal with its debts, specifically reassurances that the company was sitting down with creditors to refinance its debt.

Saurabh Dhall, an independent broker in Dubai, said there is a lot of uncertainty about how the debt crisis will play out. He said it was raising credibility concerns both about Dubai's ability to stand behind its debt obligations and the possibility, however, remote, that the crisis could impact broader government debt in the UAE.

"The major concern is not so much the dollar amount ... of the payments, it's the concern about how this will affect credibility," he said.

Investors were not reassured on Monday when Dubai officials indicated they had washed their hands of Dubai World's debts, arguing that it was an independent company that happened to be owned by the emirate.

The news rattled investors and raised more questions about whether neighboring Abu Dhabi, the oil-rich seat of the UAE's federal government, would step in with a bailout of sort and what such a step would mean for Dubai.

Dubai World said Tuesday in a statement the restructuring would include about $6 billion in Islamic bonds issued by its real estate arm, Nakheel PJSC, the company behind Dubai's iconic, palm-shaped artificial islands. About $3.5 billion of the bonds come due on Dec. 14, and Nakheel was viewed as the litmus test for how Dubai World will deal with its debt woes.

It did not deal with the broader issue of how it would meet its entire crushing debt burden.

Dubai World's statement Tuesday said the restructuring would include Dubai World and certain subsidiaries, including Nakheel World and Limitless World. Excluded from the talks are debts from Infinity World Holding, Istithmar World and Ports & Free Zone World, which includes ports and terminal operator DP World, Economic Zones World, P&O Ferries and Jebel Ali Free Zone.

The conglomerate said all those subsidiaries are on "stable financial footing," and in a statement posted on the Nasdaq Dubai Web site, Jebel Ali Free Zone said it paid a roughly $2 billion Islamic bond, or sukuk, on time Tuesday.

Other UAE markets also felt the weight of Dubai's problems. Qatar's bourse fell 8.27 percent while Kuwait's was off 2.71 percent on Tuesday.

Markets in the Emirates will be closed Wednesday and Thursday for a national holiday and will reopen Sunday after the weekend.

DUBAI OVERBLOWN

Dubai media and several business leaders rallied to support the Gulf Arab emirate's efforts to manage its debt crisis, saying problems have been exaggerated and the impact of restructuring overblown.

Riad Kamal, chief executive of Arabtec ARTC.DU, said he had no doubt about Dubai's commitment to settle its debt.

"Dubai should be given time to restructure its debt. I'm not going to lose sleep over this issue," he said.

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 palm tree-shaped islands that once attracted celebrities and the super-rich.

"I am very relaxed. Dubai has never defaulted and it will not default," Khalaf Al Habtoor, chairman of Al Habtoor Group, told Reuters by phone. "I am confident the government will meet its commitments and help the companies."

An executive at Emirates NBD ENBD.DU, one of the region's largest banks, also sought to minimise the impact, saying: "It's business as usual and there's nothing to worry about."

Nevertheless, Dubai's share index fell 5.9 percent in early trading, while DP World DPW.DI plunged 14.9 percent when UAE markets opened for the first time since the debt repayment delay was announced. Abu Dhabi's bourse also declined, losing 7.1 percent to 2,703 points.

The president of Emirates airline told London's Sunday Telegraph in an interview that he was shocked by the global fallout, but said: "Dubai will navigate itself out of this, as will we." He said the carrier would not be affected.

The English-daily Khaleej Times newspaper said the Dubai government had taken a hard look at the way Dubai Inc. operates, and will fix what has not worked.

"The need to restructure Dubai World is for real, and the decision to go ahead with it indicates maturity on the part of the emirate's decision-makers," the paper said in an editorial.

Khaleej Times defended the goverment from critics who said the announcement, made just before a four-day Eid al-Adha holiday, had undermined Dubai's credibility and transparency. "The timing of the announcement of a possible six-month delay in repaying the group's debt can be debated by market-makers, but not the intention behind it," it wrote.

OVERBLOWN

Some bankers and investors also believe last week's Dubai World restructuring announcement was blown out of proportion.

"The crisis itself has been exaggerated. It is very much localised in one sector and one group. It has been escalated to a much bigger issue," Suresh Kumar, chief executive of Emirates NBD capital said.

Ajman Bank AJBNK.DU, one of the UAE's smallest banks, said it would pursue its plan to open a Dubai branch in December.

"Since the start of the global crisis, this is not the first time a postponement has been announced in a world economy like Dubai," Ajman Bank's acting CEO Ali Alshaqoosh Al Mueen told Reuters. "The decision will certainly have been taken after a thorough review of all resulting benefits and outcomes."

Some executives at international banks active in the region also voiced confidence in Dubai.

Michael Geoghegan, HSBC Group chief executive, said in a statement at the weekend he was "confident that the leadership of Dubai and the UAE will overcome any short-term issues they face, which appear to have been somewhat sensationalised, and continue to lay the foundations for sustainable growth."

Mounir Husseini, Deutsche Bank's chief country officer for the UAE and Qatar, said in an email statement: "It is clear to me that the leadership of Dubai, supported by Abu Dhabi, is committed to taking the right steps for the UAE."

Amid a global financial-market rout, Dubai's announcement Wednesday that it would seek to delay debt payments represents the latest setback for the city-state's ruler, Sheik Mohammed bin Rashid Al Maktoum.

Last week's market mayhem was compounded by a lack of transparency from Dubai over the standstill request. A five-paragraph statement from the Dubai Department of Finance provided few details. A spokesman for the department said he couldn't comment further. A spokesman for the ruler's court didn't respond to a request for comment.

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Associated Press

Sheik Mohammed bin Rashid Al Maktoum, front right on Nov. 15, was briefed as Dubai World's troubles emerged.

Late Thursday night, Sheik Ahmed bin Saeed Al Maktoum, a senior Dubai finance official and the chairman of the Emirates airline, said in a statement that the standstill announcement had been carefully planned and promised more details this week. "This is a sensible business decision," he said.

Over the last several decades, Dubai's debt piled up as government-related companies borrowed to fund development at home and acquisitions abroad. Bankers and credit analysts assumed government support from Sheik Mohammed -- and from the federal government in Abu Dhabi -- if they ever overextended.

But when the global financial crisis hit, foreign investors fled Dubai's property market, a pillar of the economy. Unease over Dubai's debt turned into global concern, and the cost of insuring Dubai debt against default started to rise sharply. Developers, many of them state-owned, saw their cash flow disappear. Buyers, who could put as little as 10% down, stopped paying installments. Builders started complaining about missed invoices.

In February, Dubai orchestrated a novel $20 billion bond program, of which the first $10 billion tranche was fully subscribed by the U.A.E. central bank.

Dubai said it would use the money to meet its own debt obligations and unpaid bills by developers. The U.A.E. offered more, but Dubai turned down the offer, according to one person familiar with the situation.

But just as investors started to breathe easier because of the big show of federal support, Sheik Mohammed dumped his new finance chief with no explanation.

Still, Dubai made its debt payments on time. In June, Dubai World, the biggest of Dubai's corporate entities, brought in restructuring outfit Alix Partners Ltd. to advise on an overhaul.

In mid-October, Dubai World said it would shed thousands of jobs and launch a major cost-cutting effort. Selling assets quickly wasn't a real option. Many of the company's businesses were still valuable but illiquid, according to a person familiar with the situation. The company wanted to avoid a fire sale, this person said.

Amid the restructuring effort, Sultan Ahmed bin Sulayem, the chairman, was aloof, according to this person. His deputy, Jamal bin Thaniah, appointed chief executive in October, took on a more active role, this person said. Mr. Sulayem hasn't responded to requests for comment. A spokesman for Dubai World said he wasn't available.

A $3.5 billion sukuk, or Islamic bond, was coming due in December. While Dubai World signaled in the spring that a debt restructuring was an option, investors and analysts continued to expect a bailout.

In a letter to employees of Dubai World earlier this month, Mr. Sulayem said the Dubai government had assured the company "full support as an iconic company serving its role in the government's vision for the future."

A Dubai World spokesman declined to comment on the letter, except to say the company would continue to communicate with staff about the restructuring. "A restructuring process has been under way for some time and it continues," he said.

Earlier this month, Dubai's top officials gathered for a meeting of Sheik Mohammed's royal court, according to a person familiar with the situation. At Zabeel Palace, surrounded by manicured gardens, statues of prancing horses, and flittering peacocks, Sheik Mohammed was briefed on the extent of Dubai World's troubles, this person said.

In the days that followed, Sheik Mohammed announced the removal of several top economic advisers from key positions. Then on Wednesday, Dubai announced it had raised $5 billion in debt commitments from two Abu Dhabi-controlled banks. Investors interpreted the move as another indication that the federal government would come to Dubai's rescue if needed. Two hours later, Dubai came out with its standstill announcement.

U.S. stocks fell more than 1 percent in a truncated session on Friday as a possible debt default by a Dubai state-owned conglomerate led to fresh concerns about the global financial system.

The sell-off was broad, with selling concentrated mainly in the financial and commodity-linked sectors as investors trimmed positions in areas of the market most sensitive to economic uncertainty.

That hit stocks like aluminum producer Alcoa Inc , down 2.6 percent, and Bank of America , down 3 percent.

But after a slide of more than 2 percent at the open, the flight to less risky assets seemed to be subsiding, helping the major U.S. stock indexes ease back up off their lows. The U.S. dollar, which had jumped sharply as investors looked for a safe haven, pared gains and commodity prices stabilized.

The news out of the Middle East coincided with the desire by many investors to lock in 20 percent year-to-date gains in the S&P 500 after a terrible year in 2008.

"It is at least an early indication of whether investors believe this is one-time bad news or the tip of something really bad," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "Right now, it looks like investors are taking the optimistic stance."

The Dow Jones industrial average <.DJI> dropped 154.48 points, or 1.48 percent, to end at 10,309.92. The Standard & Poor's 500 Index <.SPX> fell 19.14 points, or 1.72 percent, to 1,091.49. The Nasdaq Composite Index <.IXIC> lost 37.61 points, or 1.73 percent, to 2,138.44.

For the week, the Dow dipped 0.1 percent, while the S&P 500 edged up 0.01 percent and the Nasdaq slipped 0.4 percent.

Volume was light on the day after Thanksgiving. The U.S. stock market shut on Friday at 1 p.m. (1800 GMT), which was three hours shy of its normal closing bell, but the number of declining stocks still towered over those advancing.

Standard & Poors Puts Four Dubai Banks on Credit Watch

Dubai banks Emirates Bank International PJSC, National Bank of Dubai, Mashreqbank PSC and the Dubai Islamic Bank PJSC have all been put on credit watch by Standard & Poor's rating agency after the city state's largest corporate entity, Dubai World, asked creditors for a six-month standstill on debt repayments.

The agency has placed its CreditWatch on the the 'A-' long-term rating for the four banks while affirming its 'A-2' short-term ratings on Emirates Bank International, National Bank of Dubai and Mashreqbank.

"The rating actions reflect the large exposure these banks have to Dubai World and Nakheel, and more generally to Dubai-based government related entities, and the risks that the standstill agreement would pose to these banks," said S&P credit analyst Mohamed Damak.

"This comes at a time when the deteriorated economic environment, including the fall of real-estate prices, has already started to weigh on the financial profile of these banks," he added.

Asset quality indicators are also expected to worsen as some of these banks have exposure to Ahmad Hamad Al Gossaibi Brothers and Saad Group, which defaulted on their obligations earlier in 2009.

Asian Markets and Dubai Worries

Stock markets fell across Asia on Friday as investors, spooked by news that Dubai was seeking to suspend some debt repayments, piled out of assets they considered risky.

The Hang Seng index in Hong Kong sagged 4.8 percent and South Korea’s key market gauge, the Kospi, fell 4.7 percent. The Nikkei 225 index in Japan and the Taiex in Taiwan dropped 3.2 percent. Banking shares were among the worst hit amid concerns about potential exposure to Dubai’s billions of dollars in debt.

Stock markets in Europe also headed lower during the morning, extending the falls they had suffered during the previous session. And Wall Street — which had been closed Thursday for the U.S. Thanksgiving holiday — was also set for a rocky day when markets reopen Friday.

The root of the latest turmoil was a surprise announcement on Wednesday from Dubai, one of the seven members of the United Arab Emirates, that it was asking banks to allow its main investment vehicle, Dubai World, to suspend its debt repayments for six months.

The announcement — the global high finance equivalent of a homeowner asking the bank to allow six months of skipped mortgage payments, presumably because the homeowner was out of cash — sowed fear of a contagion of instability that could roil markets that are only now recovering from the near cataclysm of the last year.

“This has sent shockwaves through the markets, even though the problems in Dubai have been known about for two years,” Emil Wolter, a Hong Kong-based strategist the Royal Bank of Scotland, said by phone from Paris.

“But it is not the trigger for a brand-new crisis. Yes, the magnitude of the situation is dramatic for Dubai. But Dubai is not America — and a property crisis in Dubai will not cause the same global crisis as a property crisis in the States.”

Still, the news stunned investors and caused markets around the world to swoon even as analysts struggled to explain which fears of contagion were legitimate and which were overwrought.

Some market experts noted, for instance, that while banks that have lent money to Dubai World could suffer significant losses if the company were to default on all or part of its $59 billion debt, worries about the sovereign debt of Middle Eastern countries swimming in oil reserves were unfounded.

Paul Schulte, head of multi-strategy research at Nomura in Hong Kong commented in a note on Friday: “Dubai was a carbon copy of Thailand’s disastrous foray as an ‘international financial center’ in the 1990s. Happily, the U.A.E. has oil. Thailand did not.”

Christopher Davidson, an expert in Gulf politics at Durham University in Britain, said Thursday: “Dubai was fairly much the worst example of overextension. It had the worst debt per capita in the world by far. I would like to put it down as a really enormous white elephant that doesn’t have much in common with the regular economy of a regular state.”

Still, in the mentality of the market, guilt by association can be a powerful force. Referring to the unexpected move by Dubai World, Mr. Davidson said, “It will tarnish the reputation of the Gulf region a bit, and it will certainly make investors more bearish again about emerging markets.”

Bank shares were among the worst hit by the global nervousness amid concerns that some might have sizeable exposures to the affected debt.

In Hong Kong, HSBC and Standard Chartered — British banks that both have large operations in the Middle East — fell 7.6 percent and 8.6 percent, respectively. Both declined Friday to comment on what exposure they had to Dubai, and Standard Chartered added that it would issue a statement “if there was anything material to disclose.”

Mr. Schulte said he believed the two banks had “insignificant exposure to Dubai.”

Like many Western consumers during the good times, Dubai gorged on debt and borrowed too much to finance a building boom that has gone bust in the downturn. When credit markets froze last year, Dubai, like Iceland, found itself overextended. But Dubai, which has little oil, was backed by its Arab emirate neighbors. At least that is what investors had assumed.

The shock announcement on Wednesday upended the assumption that Dubai would stand behind Dubai World and that other emirates, especially Abu Dhabi, would stand behind Dubai.

Saud Masud, head of research at UBS in Dubai, said Thursday that negotiators would feel pressure to reach some kind of deal to present to the markets before trading in the region resumes next week after the Eid holiday. The Dubai government’s total debt is estimated at about $80 billion, of which, Mr. Masud estimated, about two-thirds is held by local investors.

Mr. Schulte of Nomura commented in his note that, in his view, “it is not a matter of when but at what price Abu Dhabi will bail out Dubai.”

And Mr. Wolter of RBS said he believed Abu Dhabi would have no choice but to ultimately come to Dubai’s rescue. Until that becomes clear, though, he said, markets would remain extremely nervous.

On Friday, the price of oil, already undermined by the uncertain outlook for global recovery, fell to below $74 per barrel.

On the foreign exchange markets, the Japanese yen briefly hit ¥84.82 to the dollar — its strongest level against the U.S. currency in 14 years — prompting the country’s finance minister, Hirohisa Fujii, to say that he was “extremely nervous and watching the market carefully.”

“There’s no doubt the market has moved too far in one direction. Moves right now are extreme, and it would be possible to take appropriate measures,” he added, according to Reuters.

The dollar’s weakness has been broad-based, but is causing especial jitters Japan, whose economy is still struggling to emerge from a deep recession. A strong yen — which makes exporters’ good more expensive for consumers in the United States — is something Japan’s export-oriented economy can ill afford.

By late afternoon in Tokyo, the dollar had recouped some ground to trade at around ¥86.30, but it remains strong in comparison to earlier this year.

The dollar has fallen against Japanese currency for years, in part because of longstanding worries about the United States’ chronic trade imbalances and debt.

At the same time, the yen often strengthens in times of uncertainty, when Japanese investors tend to pull back on overseas investments and move their assets back to Japan. This explains why the yen has continued to appreciate despite the fact that the Japanese economy is in a deep funk, and interest rates there are ultra-low, said Patrick Bennett, a strategist at Société Générale in Hong Kong.

Mr. Bennett said he expected politicians to “ratchet up their tone” before potentially intervening in the markets. At the same time, he said, many exporters had by now learned to live with a stronger yen, meaning that the fall-out for them — and the overall economy — may not be as overwhelmingly negative as is commonly believed.