Dubai defends debt payment suspension as markets fall

A senior Dubai official has defended his government's proposal to suspend debt payments by its Dubai World conglomerate, as global stock markets fell amid fears of widespread default.

The suspension of payments on Dubai World was "carefully planned" and done in full knowledge of how the markets would react, a senior official said.

"Our intervention in Dubai World was carefully planned and reflects its specific financial position," Sheikh Ahmed bin Saeed al-Maktoum, chairman of the Supreme Fiscal Committee, said in a statement.

He added that "further information will be made available early next week."

"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."

Ratings agency Standard and Poor's described the debt moratorium as a default.

Global stock markets dropped for a second day running yesterday over investor alarm about the potential for a widespread default.

Asian indices suffered massive falls, with Hong Kong's Hang Seng Index slumping almost five per cent by the close. Tokyo dived 3.22 per cent, hit also by the yen striking a fresh 14-year high point against the dollar, which is bad for Japanese exporters.

Shortly after the start of European trading, London's benchmark FTSE 100 index was down 0.36 per cent at 5,175.44 points, one day after falling by its sharpest amount since March.

Frankfurt's DAX 30 shed 0.56 per cent to 5,582.50 points and in Paris the CAC 40 lost 0.51 per cent to 3,660.68.

Dubai has seen a surge in extravagant building projects, with vast skyscrapers springing up in the desert state, but it has suffered in the global financial crisis.

Most of its debt is held by state-backed companies.

Dubai World, which reportedly has $59 billion in liabilities, owns a range of businesses including international ports operator DP World and giant property developer Nakheel.

Until recently the jewel in the crown of Dubai's construction boom, Nakheel was due to pay off about $3.5 billion in maturing Islamic bonds in December.

Sheikh Ahmed insisted that "unprecedented growth, in Dubai and across the (United Arab Emirates), over the past decade has helped lay the foundation for what is now a broad-based sustainable economy beyond just natural resources."

"Like most global cities, Dubai has experienced its share of economic and social challenges in this global downturn," Sheikh Ahmed said. "No market is immune from economic issues. This is a sensible business decision."

But he said "economic fundamentals, such as our highly developed infrastructure, strong transport and communications hub and regional financial centre will ensure Dubai remains an attractive regional market."

Dubai's move triggered fears of a domino effect across the emirate's indebted state-run corporates, pushing debt rating agencies to slash the grading of Dubai companies.

The fear of Dubai's default "fed a climate of insecurity and crisis of confidence at a time when fears are mounting about excessive public debt," said Xavier de Villepion, an analyst with Global Equities.

Moody's rating agency said it downgraded six government-related companies, including Dubai World entities, while Standard and Poors downgraded the ratings of five of those companies.

"In our view, such a restructuring may be considered a default under our default criteria, and represents the failure of the Dubai government (not rated) to provide timely financial support to a core government-related entity," S and P said.

Fitch Ratings agency downgraded two of Dubai's top public firms on Thursday, lowering its Issuer Default Ratings for Dubai Holding Commercial Operations Group LLC and the Dubai Electricity and Water Authority from 'A-' to 'BBB-', with Rating Watch Negative and Outlook Negative respectively.

"The above corporate entities have strong operational and strategic ties with the Dubai government and the downgrades reflect Fitch's re-assessment of the ability of the Dubai government to support them," the agency said.

Dubai's total debt reached $80 billion last year, of which government companies owed some $70 billion.

The announcement came on the heels of another, that Dubai had secured a further $5 billion through a new bond issue, fully subscribed by two banks controlled by the government of Abu Dhabi.

The new bonds demonstrate that Abu Dhabi, the oil-rich partner in the UAE, is still ready to help Dubai, but the extent of that support remains unknown.

Meanwhile, it emerged that Japan's top banks have hundreds of millions of dollars exposed to Dubai World, analysts said yesterday.

Japan's largest banks Mitsubishi UFJ Financial and Sumitomo Mitsui are among a consortium of 11 creditors that have lent to Dubai World, one of Dubai's flagship groups, analysts at Citigroup said.

Sumitomo Mitsui is owed more than $200 million by the entity, sources familiar with the matter told AFP separately.

Citigroup said the remaining lenders are largely composed of European and Middle Eastern banks, adding that their loans total $16.5 billion.

An MUFJ spokesman declined to comment.

Media reports have also said Japan's second biggest bank Mizuho has an exposure worth $100 million. A spokesman declined to confirm the reports, saying that the bank does not comment on individual deals.