Traders jittery after UAE bank's bid to restore confidence is overshadowed by emirate's refusal to guarantee debts
Emarati men follow the latest stock changes at the Dubai financial market
The unfolding events in Dubai continued to weigh on stock markets across Europe today, despite attempts by the central bank of the United Arab Emirates to contain the financial crisis.
On the first day of trading after the Eid holiday, stock markets in the UAE had their first chance to react to the announcement last week that Dubai World – the owner of P&O shipping and extensive property in the UK – was struggling to meet repayments on its $59bn (£36bn) debt. In Dubai, the stock market plunged 7.3% while in Abu Dhabi, the fall was 8.3%. A combined $9bn was wiped off UAE markets.
In London, where many banks have large exposure to the Dubai economy, continued anxiety about the potential repercussions of the crisis dragged the FTSE 100 index of leading shares 1.1% lower, to close at 5190.68, erasing gains made on Friday. James Hughes, market analyst at CMC Markets, said the session had been "dominated by nervousness surrounding the debt situation in Dubai" and there remained "suspicions that we could well get yet more surprises".
On Sunday, the UAE central bank, which is largely propped up by oil revenues from Abu Dhabi, provided some comfort by saying it "stands behind" local banks in the region, including branches of foreign operations, by offering emergency funding to head off the threat of a possible run. But while the comments appeared to ease fears, later remarks by the Dubai government that it would not stand behind the debts of Dubai World again unnerved investors.
In an interview on local television, the director general of the department of finance made it clear that the government does not believe itself under any obligation to guarantee the debts of the state-owned company.
The comments sparked anger about the perceived lack of transparency in Middle Eastern markets.
One broker said investors had expected to hear more from the Dubai government. "They are doing what they can to differentiate between the government and companies," he said. "People's expectations aren't going to be met with this announcement and we will enter a new reality in the region and one that, over time, will put increasing pressure on all issuers to improve transparency and corporate governance."
Part of the concern among investors has come from the repeated reassurances from officials that Dubai was not in any financial difficulty.
KPMG is leading a committee of creditors – including Lloyds, HSBC, Royal Bank of Scotland and Standard Chartered and two local banks – in seeking meetings with Dubai officials.
But with the local markets set to close again between Wednesday and Sunday for a national holiday, it is not expected to secure one until next week. The banks were among the biggest fallers in London, with Lloyds Banking Group down 5.9% and Standard Chartered 4.5% lighter. Germany's DAX and France's CAC-40 also ended the day 1.1% lower.
Dubai World is shouldering the majority of the $80bn debt accrued in Dubai during the boom of the last decade that sought to reshape the city state as a glittering millionaires' playground and tourist destination. The downturn has resulted in property prices dropping from their peak by 50% this year.
A local investment bank, EFG-Hermes, worsened sentiment when it suggested a truer figure for Dubai's debt could actually be between $120bn to $150bn, if non-public information were included.
Investors have been looking impatiently at Dubai's oil-rich neighbour, Abu Dhabi, in the hope that it might step in and help to stabilise the situation.
But Abu Dhabi officials have made it plain that they will not write a blank cheque to Dubai, regarded in the region as an errant and wayward state by the more conservative parts of the UAE.
On Saturday, Abu Dhabi said it would "pick and choose" what parts of Dubai it would step in and help. "We will look at Dubai's commitments and approach them on a case-by-case basis," a government official said.
In a turbulent four-hour trading session in Dubai, shares in Dubai World fell by 15%, while Nakheel, its property arm, and the developer of the man-made islands in the shape of a palm tree, requested that trading in three of its listed Islamic bonds be suspended until its restructuring could be finalised. Emaar, the state-run firm behind the world's tallest building, Burj Dubai, fell 9.9%.
In a statement, the National Bank of Abu Dhabi said it had $345m exposure to two Dubai World units, knocking 9.7% off its shares. The credit ratings agency Moody's said contagion effects for the neighbouring state was unavoidable.
