World leaders expressed confidence in the global economic recovery on Friday despite fears about a debt default by Gulf emirate Dubai, while major banks played down their exposure to the debt.
Stocks from Tokyo to New York were haunted by concern that banks were exposed to state companies in Dubai, whose rise from a desert backwater into the business hub of the world’s top oil exporting area lured expatriate cash and executives.
“While it is a setback, I think we will find it is not on the scale of previous problems we have dealt with,” British Prime Minister Gordon Brown told reporters in Port of Spain. “The world financial system is stronger now and able to deal with the problems that arise.”
French Prime Minister Francois Fillon said the Gulf had the resources to ensure the world would not sink into a second round of turmoil, but Russian Prime Minister Vladimir Putin said the saga showed how hard it is to shake off a crisis that has lasted two years.
In the US, administration officials said the Treasury Department was closely monitoring the situation in Dubai, while Canadian Finance Minister Jim Flaherty said the G7 industrialized nations has had discussions about Dubai’s credit issues and was monitoring consequences.
Japanese Finance Minister Hirohisa Fujii raised the prospect of a G7 joint statement on currencies in Tokyo after the Dubai debt worries pushed the Japanese yen to a new 14-year high against the dollar. But no such statement has been issued and the yen retreated from its earlier highs.
The crisis began on Wednesday when Dubai, part of the United Arab Emirates (UAE) federation, asked to delay payment on billions of dollars of debt issued by conglomerate Dubai World and its main property subsidiary Nakheel, developer of three palm shaped islands that once attracted celebrities and the super-rich.
Dubai World had US$59 billion in liabilities as of August, most of Dubai’s total debt of US$80 billion. International banks’ exposure related to Dubai World could reach US$12 billion in syndicated and bilateral loans, banking sources told Thomson Reuters LPC.
However, the numbers pale in comparison to the US$2.8 trillion in writedowns the IMF estimates US and European lenders will have made between 2007 and next year.
“The events in Dubai in recent days are one of the hiccups if you like, one of the difficulties, which affirms that we were right to highlight the uncertainty ahead of us and that the road ahead could be a bumpy one,” European Central Bank Governing Council member Athanasios Orphanides said.
Analysts expect Dubai to receive financial support from Abu Dhabi — a fellow member of the UAE and home to most of its oil — though it may have to abandon an economic model focused on developing swathes of desert with foreign money and labor.
However, the prospect of a bailout did little to allay concerns among investors, already worried the global economy may not be recovering quickly enough to justify a near doubling of prices for emerging market stocks and many commodities since March.
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