Dubai's Debt Crisis Presents Danger for World Economy

Dubai 's debt crisis led investors to snap up safe U.S. Treasury securities Friday.

Photo: Dubai's Debt Crisis Presents Danger for World Economy

The U.S. market reaction mirrored moves elsewhere in the world a day earlier, when New York was closed for the Thanksgiving holiday. Early moves in Treasurys and corporate bonds, exaggerated by thin trading in a holiday-shortened session, partially reversed by later in the day.

Dubai on Wednesday said it was seeking a six-month "standstill" on debts owed by its corporate flagship, Dubai World. The news rattled investors, who sold stock across Europe and Asia and demanded higher premiums for insurance against Dubai defaults.

"People are scrambling to evaluate the situation in Dubai, with worries about U.S. and European banks' exposure there," said Richard Bryant, senior vice president of U.S. Treasury trading at MF Global Inc. in New York. "But the buying in Treasurys could have been a bit overdone."

At the end of the shortened day Friday, Treasury prices had moved off their session highs but posted a weekly gain. The yield on the 10-year note, which earlier was 3.15%, the weakest level since Oct. 2, was 3.21%.

"It seems that the initial shock effect has worn off," said Matthew Strauss, currency strategist at RBC Capital Markets in Toronto, The Wall Street Journal reports.

It was also reported, 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, Channel News Asia reports.

Meanwhile, fears are growing over Britain's exposure to the financial turmoil in the stricken Arab state of Dubai.

UK banks account for half the £60billion of global loans to the debt-laden emirate, new statistics show.

State-controlled giant Royal Bank of Scotland has helped lead the charge, provoking fears that taxpayers could be stung if the loans go unpaid. The Treasury has already injected £45.5billion into RBS, which became a watchword for reckless lending.

Meanwhile, question marks hang over the fate of thousands of Britons employed by companies under Dubai's control. The emirate's investment vehicles hold interests in Alton Towers, the London Eye, P&O, hotel chain Travelodge, and the London Stock Exchange, Daily Mail reports.