Offshore Capitalist

Dubai debacle stops bull run in its tracks

Global stock markets plunged last week as investors feared a dangerous new phase in the economic crisis after Dubai asked to suspend debt repayments.

The Dubai government’s investment vehicle, Dubai World, sought late on Wednesday to shelve its obligations for six months. It had $59 billion (£36 billion) of liabilities at the end of August, most of Dubai’s total debt of $80 billion.

The news sent markets into a tailspin, with Britain’s biggest stocks suffering their heaviest one-day fall since March.

What has happened?

The crisis started when Dubai asked to delay payment on debt issued by Dubai World and its main property subsidiary, Nakheel, the developer of three palm tree-shaped islands that once lured the super-rich.

Many companies and high-profile projects are dependent on Dubai for funding and the problems raised fears that the world’s economic recovery could be thrown off course.

International banks’ liabilities related to Dubai World could be as high as $12 billion in loans, according to banking sources. The three foreign banks with the biggest exposure to the United Arab Emirates are British — Standard Chartered, HSBC and Barclays — according to the Emirates Banks Association.

What was the immediate impact?

Although the scale of Dubai’s debts is a far cry from the $2.8 trillion in writedowns that the International Monetary Fund estimates US and European lenders will have made between 2007 and 2010, the uncertainty spooked stock markets from Tokyo to London.

More than £40 billion was wiped from the FTSE 100 on Thursday, with the index plunging 171 points, or 3.2%, to 5,194. Standard Chartered, thought to have invested more than any other UK bank in the Middle East, dropped almost 6%, while HSBC lost 5%.

“This is an important reminder that the credit crisis is forgotten but not gone,” said Robert Rennie, strategist at Westpac Global Markets Group.

The FTSE 100 stabilised to close the week down five points at 5,246.

via Dubai debacle stops bull run in its tracks – Times Online.

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