Markets edge back with eye on Dubai

Europe rebounds after fiscal committee explains decision to restructure Dubai World.

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ABU DHABI // World stock market reactions were cautiously mixed yesterday after plunging the day before in response to Dubai World's decision to ask for a delay in debt repayments. Foreign leaders, meanwhile, expressed confidence that a global recovery was still in the works. Stock markets in London, Frankfurt and Paris closed up by at least one per cent despite steep losses in Asia. In New York, markets were down about 1.5 per cent in a half-day holiday session. The dollar climbed back to 86.80 yen after hitting a 14-year low of 84.82 yen the day before, and the price of oil dropped more than two per cent, to about US$76. In a statement released early on Friday, Sheikh Ahmed bin Saeed Al Maktoum, the chairman of the Supreme Fiscal Committee, which is responsible for Dubai's monetary policies, explained the decision to restructure Dubai World. "Our intervention in Dubai World was carefully planned and reflects its specific financial position," he said. "The Government is spearheading the restructuring of this commercial operation in the full knowledge of how the markets would react. 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." World leaders also chimed in. The British prime minister, Gordon Brown, called the situation in Dubai a "setback" that would turn out to be "not on the scale of the previous problems we have dealt with", according to the Press Association news service. The Russian prime minister, Vladimir Putin, said debt problems in Dubai once again showed it would be tough for the world to come out of the financial downturn. "The exit from the crisis won't be easy and fluctuations are possible," he said, adding that Dubai's debt issue had had an impact on the Russian economy. "The stock market has gone down slightly and the dollar has strengthened versus the rouble." "But all in all, I think the tendency toward an exit from the crisis will prevail." The impact of the announcement on regional stock markets, which are closed until Monday in observance of the Eid al Adha holiday, was still not clear. Analysts said shares from companies thought to have heavy exposure to Nakheel and Dubai World would see pressure. "There has obviously been quite a shock," said Ghanem Nuseibeh, a Gulf risk analyst at Political Capital. "We do not know exactly who is exposed to Dubai and to what extent."The market swings yesterday took place after the Dubai Government sought to assuage concerns over its ability to deal with the emirate's estimated $85 billion worth of debt. Dubai World has said it has obligations and debt of $59bn, with $9bn of debt coming due in the next four months alone. The announcement of the new restructuring plans came out late on Wednesday in a statement from the Dubai Financial Support Fund (DFSF) hours after the Dubai Government announced that it had successfully raised another $5bn in financing from Abu Dhabi banks on top of the $10bn it raised last year in a bond issued to the Central Bank. The DFSF said it had taken over the restructuring efforts at Dubai World, appointing Aidan Birkett, a managing partner at Deloitte LLP, as chief restructuring officer. But the most important part of the statement came at the end. The DFSF said: "As a first step, Dubai World intends to ask all providers of financing to Dubai World and Nakheel to 'standstill' and extend maturities until at least 30 May 2010." This focused attention on a $3.52bn sukuk that Nakheel, the property development arm of Dubai World, must pay on December 14. Bondholders called a conference call to discuss their options on Thursday, but it was cancelled when the lines were flooded with too many calls, according to organisers. Dubai World and the DFSF are expected soon to put forward a proposal to these bondholders - many of which are Emirati banks and companies - on how to handle its obligations. Saud Masud, an analyst at the Swiss bank UBS, said the impact of not paying Dubai World's debts on time would be negative for Dubai because it would be more difficult to persuade foreign investors to lend money at attractive rates to the emirate in the future. But the overall strategy could be positive in the long term, with investors feeling that Dubai companies are held to stricter standards. "We believe that this could very well be the realisation that you cannot necessarily buy yourself out of the crisis," Mr Masud said on a conference call with investors and journalists yesterday. "You have to let market forces take control, and the entities, the corporations, have to be held accountable." Ratings agencies have downgraded the credit ratings of several government-related companies by two to four notches because of what they called renewed questions over the Government's financial support. Standard & Poor's also placed three Dubai-based banks - Emirates NBD, Mashreqbank and Dubai Islamic Bank - on "ratings watch", citing concern over their exposure to Dubai World. The impact of the announcement spread across the global markets on Thursday. The FTSE 100 index in London lost 3.18 per cent, or 170.68 points. The DAX index in Germany fell 3.25 per cent and the CAC-40 index in France lost 3.41 per cent. In Tokyo, the Nikkei 225 stock average, fell by about 0.62 per cent. US markets were closed for the Thanksgiving holiday. The cost of insuring Dubai's debt increased for the second-straight day on Friday, with five-year credit default swaps rising by 129 basis points to 670 basis points by the afternoon. Credit default swaps for DP World - the ports company owned by Dubai World - increased from 608 basis points to 818.5. In his statement on Thursday, Sheikh Ahmed also emphasised that the issues in Dubai were part of a worldwide economic crisis and would be resolved in a way that makes Dubai World a stronger company. "Like most global cities, Dubai has experienced its share of economic and social challenges in this global downturn," he said. "No market is immune from economic issues. This is a sensible business decision. We want to ensure resources are deployed in the full knowledge that they are used to enhance the businesses of the Dubai World Group, build on the restructuring that has already been taking place and ensure long-term commercial success."