A senior Dubai official defended on Thursday 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 on Thursday.
“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.
European stock markets dropped sharply on the news, with European exchanges particularly hard hit. Paris and Milan each plunged by more than three percent in afternoon trading on Thursday. US markets were closed for the Thanksgiving holiday.
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 dollars 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 dollars 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.
While the announcement was made after the closing of Dubai’s stock market for a long Eid holiday, the value of Nakheel’s 2009 bonds dropped by 27 percent, according to EFG-Hermes regional investment bank.
Dubai’s total debt reached 80 billion dollars last year, of which government companies owed some 70 billion dollars.
The announcement came on the heels of another, that Dubai had secured a further five billion dollars 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.