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. The crisis began on Wednesday when Dubai, part of the United Arab Emirates 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. “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 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 premier Vladimir Putin said the saga showed how hard it is to shake off a crisis that has lasted two years. In the United States, administration officials said the Treasury Department was closely monitoring the situation in Dubai, while Canadian Finance Minister Jim Flaherty said the Group of Seven 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 currency to a new 14-year high against the dollar. But no such statement has been issued and the yen retreated from its earlier highs. Dubai World had $59 billion of liabilities as of August, most of Dubai's total debt of $80 billion. International banks' exposure related to Dubai World could reach $12 billion in syndicated and bilateral loans, banking sources told Thomson Reuters LPC. But the numbers pale in comparison to the $2.8 trillion in writedowns the International Monetary Fund estimates US and European lenders will have made between 2007 and 2010. “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. But 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. The fears of a possible Dubai debt default rippled through world markets for a second day on Friday, but the exodus from stocks and the rush to the safe-haven US dollar and bonds slowed as investors discounted the possibility of contagion in other emerging markets. The Dubai announcement served as a catalyst to an “overdue correction” to markets whose valuations have outpaced economic and corporate realities, Mohamed El-Erian, chief executive officer of Pacific Investment Management Co. told Reuters. The Dubai news raised fears that some major banks could face yet more writedowns in addition to those already triggered by the global financial crisis in 2008. But HSBC, Europe's biggest bank and the one with more loan exposure to the UAE than any other at around $15.9 billion, said it was not concerned. JP Morgan said it was less concerned about global banks' direct exposure to Dubai World and was not worried about Abu Dhabi, which is sitting on hundreds of billions of dollars. “We are more concerned about the spillover effect within the UAE,” it said in a note. “It remains unclear if the Dubai government will support the liabilities of government related entities.” Lenders in Abu Dhabi have lent heavily to Dubai and could suffer. The costs to insure Dubai go”Dubai as a state... is not on the verge of bankruptcy, thanks to the support of Abu Dhabi,” said Pascal Devaux, Middle East risk assessment economist at BNP Paribas. “Abu Dhabi would not allow the financial collapse of Dubai,” said Dubai-based analyst Ibrahim Khayat. But he said the UAE heavyweight, which sits on more than 90 percent of the federation's oil reserves and owns the world's largest sovereign wealth fund, might seek to bring Dubai under its control. “Abu Dhabi could allow the weakening of Dubai within the framework of the competition between the two, but a collapse of Dubai would also affect Abu Dhabi,” Khayat said. Monica Malik, from EFG-Hermes investment bank, pointed out that it is not just Dubai that would be affected. “This announcement highlights the substantial headwinds facing the UAE economy,” she said. Abu Dhabi has already come to Dubai's help twice since the once-booming emirate was hit by the global crisis last autumn. The first time was in February, when the UAE central bank pumped 10 billion dollars into a support fund established by Dubai to deal with its mounting debt issue. In New York, Dubai's debt woes could further unhinge an already fragile US commercial real estate, as it illustrates the importance of that tiny country to global investors in an increasingly interconnected world. A state-owned investment conglomerate Dubai World, with $59 billion of liabilities, set off a global stock market selloff this week after it said it wants to restructure its debt, including at its property subsidiary Nakheel. “This downturn has had more of a global impact,” said Tony Ciochetti, chairman of Massachusetts Institute of Technology's Center for Real Estate in Cambridge, Massachusetts. “As I try to explain to my students, with a global economy, we're all attached at the hip financially in some way, shape or form,” he added. The Dubai news also cast doubt over the strength of the fledgling US economic recovery, and the prospects for a bottoming of property prices. “Dubai may have to unload some very prestigious properties at distressed prices and this will drive the price of all commercial real estate lower,” a banking analyst said.
