Investors recoiled from risky assets on Friday and dumped shares in Asian banks and builders, fearing a Dubai debt default could reignite the financial turmoil of the credit crisis.
Stocks in Tokyo and Hong Kong were haunted by suspicion of lenders’ exposure to the Dubai firms that built palm-frond shaped islands in the Gulf and planned cities from Pakistan to Africa. The emirate, which emerged from dusty obscurity to became a trading and tourism hub with global ambitions, said on Wednesday it would ask creditors of state-owned Dubai World and Nakheel to agree to a standstill on billions of dollars of debt as a first step towards restructuring.
Dubai World, the conglomerate that led the emirate’s expansion, had $59-billion of liabilities as of August, a large proportion of Dubai’s total debt of $80-billion. Nakheel was the builder of three palm shaped islands off Dubai.
The news shook markets that are recovering from the collapse of the US housing market and contagion that threatened to rupture the global financial system last year.
”The panic button’s been hit again,” said Francis Lun, general manager of Fulbright Securities.
Analysts expect financial support from Abu Dhabi, like Dubai a member of the United Arab Emirates and home to most of the emirates’ oil. But Dubai might have to abandon an economic model that focused on heavy real estate investment and inflows of foreign money and labour.
Shares in HSBC Holdings dropped more than 7% and Standard Chartered fell 6%. The London listed shares of the two lenders led the biggest tumble in European bank stocks in six months on Thursday.
”If this eventually becomes an issue that affects the banks, once again it will put in doubt their capacity to start lending, which is a key factor in all the strategies to reactivate economies,” said Carlos Ponce, head of equity strategy at brokerage IXE in Mexico City.
Exposure to Dubai World could be as high as $12-billion in syndicated and bilateral loans, including existing loans for Nakheel and Istithmar, an investment arm of Dubai’s government, banking sources told Thomson Reuters LPC.
The Dubai crisis could have a ”meaningful impact” on banks across Asia, said Daniel Tabbush, Asia banks analyst at CLSA in Bangkok, listing Standard Chartered, HSBC and Singapore’s DBS Group as the most exposed in the region.
DBS shares were not traded due to a market holiday in Singapore.
Builders took a beating from Seoul to Sydney on concern that money due from Dubai’s grandiose construction projects, including the world’s tallest building, would not be paid.
Australian construction firm Leighton Holdings said on Friday it was owed money on a few separate Dubai building projects, but that it was confident of recovering the money. The stock fell more than 3,5%.
Dubai’s debt problems are a hangover from a property bubble that imploded after the financial crisis derailed its plans to become a magnet for tourists and a regional hub for everything from financial services to media and entertainment.
The delays in debt payments and the risks that posed to a global financial system already battered by bank failures in Europe and the United States, raised fears of a new wave of market turmoil.
”Similar stories to the one in Dubai are likely to come out, leading risk money to pull out from assets such as commodities and stocks,” said Takahiko Murai, general manager of equities at Nozomi Securities in Japan.
Japan’s top bank Mitsubishi UFJ Financial Group slipped as Japan’s Nikkei average struck a four-month low. It also came under under pressure from weak exporters after the dollar hit a fresh 14-year low against the yen. The Australian and New Zealand dollars retreated.
Oil extended Thursday’s decline and fell below $76 a barrel. Shanghai copper and Chicago grains each dropped about 2%.
Dubai tried to revive confidence by saying on Thursday its profitable DP World, which runs 49 ports around the world, would not be involved in the restructuring.
DP World, which has $3,25-billion outstanding in bonds, is majority owned by Dubai World but has shares listed on NASDAQDubai.
If creditors reject proposals to postpone near-term debt obligations until May 2010, the Dubai government could be forced to hold a firesale of its international real estate. – Reuters