Dubai shock raises financial risk fears
Posted: 28 November 2009 0422 hrs

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LONDON - The shock news of Dubai's debt problems raised fears of a return to the darkest days of the financial crisis as markets plunged across the globe, but analysts Friday downplayed the long-term risks.

Markets in Asia, Europe and the United States stumbled as fears of bad debts bred fresh concern for the world economy after Dubai's shock request to suspend major loan repayments.

Shaken investors were holding their breath Friday to see if the unexpected announcement from the once-booming Gulf Emirate would trigger fresh danger for the world economy, akin to the collapse of Lehman Brothers.

The US investment bank's demise in September 2008 sent shock waves around the world and heralded the start of the most painful phase of the global financial crisis.

But analysts played down fears that the request from the Dubai government investment vehicle Dubai World to suspend debt payments for six months signalled an end to the global economy's fragile recovery.

Adarsh Sinha, from Barclays Capital, said the dramatic events of the past year meant hardened policymakers were now better prepared.

"The question is whether this will be a replay of (the fourth quarter in 2008) or be a shorter, more benign correction," said Sinha.

"The key difference between now and then is that the policy authorities are much more on guard to prevent financial market events from generating systemic risk."

Dubai's problems were related to the collapse of property markets, rather than the "start of a new financial crisis," said analysts from Capital Economics in a note.

"Nonetheless, they are a timely reminder that the legacy of past excesses in heavily-indebted economies will linger for many years to come," they said.

Others played down the prospect of shockwaves spreading out from Dubai.

John Sfakianakis, of Calyon, said international investors had "genuine faith" in the region.

"Credit quality deterioration simply is not an issue in Saudi Arabia, Abu Dhabi and Qatar and we expect that in the short term, investors will calm down," he said.

There was more concern, however, about the exposure of large international banks, particularly those in Britain, to Dubai's financial problems.

The direct exposure of European banks to Dubai, according to Credit Suisse, is limited to just 13 billion dollars (8.7 billion euros).

But Luis Costa of Commerzbank said the shock could lead banks to rethink their investments, predicting "a potentially systemic hit on global capital flows" to emerging markets.

Kit Juckes, chief economist from ECU, however, saw little danger in the fall in markets following the news from Dubai.

"I see Dubai more as a catalyst for market positions to be taken off" on overheated stock exchanges, rather than "as a defining moment in this year's trends," he said.

"Dubai was a one-off bubble. Nowhere else has there been so much extravagant construction," Juckes added.

- AFP /ls