No blank cheque for Dubai, warns oil-rich neighbour

Published on Saturday 28 November 2009 12:22

WORLD markets are bracing themselves for further turmoil this week as Abu Dhabi has said it will "pick and choose" how to assist its debt-laden neighbour Dubai.

There has been speculation that oil-rich Abu Dhabi, which has hundreds of billions of dollars in its sovereign wealth fund, would step in to underwrite all of Dubai's debts. News that it will tailor any rescue package by cherry-picking the assets it is interested in will come as blow to global economies.

Abu Dhabi is capital of the United Arab Emirates and one of the world's top oil exporters. An Abu Dhabi official is reported as saying: "We will look at Dubai's commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts."

He added: "Some of Dubai's entities are commercial, semi-government ones. Abu Dhabi will pick and choose when and where to assist."

The Dubai debt crisis rattled world financial markets last week raising concerns that some banks could further tighten lending and stall the global economic recovery.

The possible spillover effects centred on fears that international banks could suffer big losses if Dubai's investment arm defaulted on its $60 billion (36bn) debt.

The Financial Services Authority (FSA) is understood to have told Britain's biggest banks to be open about their exposure to troubled parts of Dubai.

Analysts at JP Morgan said lenders' main exposure is through $14bn (8.5bn) of syndicated loans to Dubai World. They said Royal Bank of Scotland may have the biggest potential problem as it helped arrange $2.3bn of these loans. But it is unclear how much RBS passed on to other lenders and analysts said it could have exposure to just 10 per cent of the total sum.

Stock and commodity markets tumbled in New York, London and Asia as investors flocked to the US dollar as a safe haven. On Friday, the Dow Jones industrial average lost about 155 points. Oil prices plunged as much as 7 percent before recovering ground later in the day.

The FTSE 100 recovered from turmoil on Thursday to close up 51.60 points at 5,245.73 pence.

"I don't think the collateral damage is going to be that great," said Jeffrey Saut, chief investment strategist at Raymond James. He added that balance sheets have healed enough to withstand a shock like Dubai.