Concerns that the debt-ridden emirate of Dubai will be unable to pay back US$60 billion to its creditors has sent worldwide markets spinning, as oil prices dropped and commodities and currencies dived during trading on Friday.
Markets have been reeling since Dubai World, an investment company owned by the Middle Eastern city state, asked creditors if it could postpone forthcoming interest payments for six months.
That news, released earlier this week, prompted credit agencies to slash debt ratings on Dubai state companies and stoked fears of a potential default.
In response, Asian stock markets tumbled Friday, following a similar rout in Europe the day before. Hong Kong's Hang Seng market closed 4.8 per cent lower than the day before, and South Korea's benchmark dropped 4.7 per cent.
The price of oil dropped near US$74 a barrel during Friday trading in Asia. On European markets, oil prices dropped $4.01, to $73.95, before recovering.
By noon Friday Toronto's S&P/TSX composite index had recovered 95 points, to 11,531. Earlier in the day the index tumbled 200 points based on the news of Dubai World's troubles.
South of the border, New York stock markets closed down after a shortened day of trading. The Dow Jones industrial average dropped 155 points to 10,310. On the New York Stock Exchange, five stocks fell for every one that rose.
The chairman of Dubai's Supreme Fiscal Committee, Sheik Ahmed bin Saeed Al Maktoum, said the call to defer Dubai World's debt payments was "carefully planned." The government-owned group of companies is being restructured, he added.
But BNN's Michael Kane said the reaction among many investors was to sink money into the U.S. dollar "as a safe currency to hold," as they dealt with the fallout from Dubai.
"So as the U.S. dollar shoots higher, that drives down the price of gold, the price of oil, the Canadian dollar," Kane told CTV's Canada AM on Friday morning.
The U.S. dollar gained ground against most other major currencies Friday. The loonie dropped by 1.35 US cents on Thursday, but has since risen slightly to 94.19 cents U.S.
Banks face threat
The concerns about debt in Dubai have put billions of dollars at risk for foreign banks.
"The amount of money that's at stake here, it's only about $60 billion...but a lot of European banks, especially British banks, have got money invested in Dubai," CTV's Tom Kennedy explained to Canada AM from London.
"There's a real concern about all the construction projects there that have been halted or closed down -- the big property bubble in Dubai. People are wondering if this is really a symptom of really more severe problems. So things are very, very jittery for the moment."
Goldman Sachs analysts estimate that the London-based HSBC Holdings could stand to lose $611 million and Standard Chartered could lose $177 million if Dubai defaults on its loans. Both companies have substantial Middle East holdings.
In Japan, the country's No. 3 bank, Sumitomo Mitsui Financial Group, could be looking at a loss of several hundreds million dollars, said a person familiar with the matter. South Korea estimated the country's financial institutions could be on the hook for $88 million.
Canadian banks have limited or no exposure to Dubai's debt, analysts said.
Some experts believe that Dubai World's debt issues could force greater transparency from the semiautonomous city-state that has steadily drawn in international investment for the past decade.
"It touched investors' sensitive nerves," said Cai Junyi, an analyst for Shanghai Securities. "The world is watching whether that will have any substantial impact ... Dubai World is just like a small window that might reflect another financial tsunami."
Carleton University professor Ian Lee believes that if Dubai were more transparent, there would be fewer concerns about its problems with debt.
"I don't think that the shock and the reaction would be anywhere near as severe, I think it would be much more muted," he told CTV News Channel during an interview from Ottawa on Friday morning.
But Lee said Dubai probably won't be forced to default on its debt because of the ties the emirate holds to oil-rich Saudi Arabia and Abu Dhabi.
They will likely "step in at some point to calm the market, to let bankers know they're not going to lose their total investments in Dubai," Lee said.
Dubai's government announced Wednesday that it would issue US$5 billion in bonds thanks to loans from two banks owned by neighbournig Abu Dhabi, a neighboring city state that's one of the world's largest oil producers.
Investors are waiting for more financial news from Dubai. Markets there were closed today because of the Muslim Eid holiday, and won't reopen until next week.
While there is much concern about what will happen in the immediate future, some analysts and investors are taking a longer-term look at investment opportunities in Dubai's economy, which had been growing quickly until the financial crisis struck.
"I think it will make investors realize they need to be more discriminating about emerging markets," said Arjuna Mahendran, head of Asian investment strategy at HSBC Private Bank in Singapore. "In the longer term we have no doubt that things are going to recover."
With files from The Associated Press
