Dubai struggled to ease fears of debt default on Thursday after its move to delay repayments at two flagship firms shook confidence in Middle East..!!

DUBAI STRUGGLES TO ASSUAGE DEBT FEAR

Dubai debt fears weigh on bank stocks, credit default swaps soar, rise for neighbours

(Reuters) - Dubai struggled to ease fears of debt default on Thursday after its move to delay repayments at two flagship firms shook confidence in the Middle East as a centre for investment and a source of capital.

Dubai's debt problems, a hangover from a property boom that produced the world's tallest building, have shaken trust among Western investors who turned to the oil-exporting Gulf region for help during the global financial crisis.

The emirate said on Wednesday it would ask creditors of Dubai World, the conglomerate behind its rapid expansion, and Nakheel, builder of its palm-shaped islands, to agree a standstill on billions of dollars of debt as a first step towards restructuring On Thursday, Dubai tried to revive confidence by saying its profitable DP World, which runs 49 ports around the world, would not be involved in the restructuring. DP World, which has $3.25 billion outstanding bonds, is majority owned by Dubai World but has shares listed on NASDAQ Dubai.

“It might be a move to distinguish the solvent from less solvent companies in an attempt to shift the weight away from the less exposed entities,” said John Sfakianakis, chief economist at Saudi Fransi bank.

But European bank shares, which had recovered in recent months on hopes that the worst of a global crisis was over, fell to lows not seen since May on Dubai's debt delay.

There was no immediate sign that U.S. banks were exposed, but it was difficult to ascertain, given Thursday's Thanksgiving holiday.

“It is not so much that Dubai did what they did, but how they did it ... with no notice,” said Andrew Brenner, head of emerging markets at Guggenheim Securities. “Spreads on a lot of fixed income products have gotten to very rich levels and the Dubai default will force risk to get repriced downward. Either way, look for a flight to quality scenario tomorrow on a holiday-shortened day.” Shares in companies in which Gulf investors own big stakes, including the London Stock Exchange, UK grocer J Sainsbury and German carmakers Porsche and Daimler, also fell sharply on concerns the holdings would be cut to meet obligations at home.

Exposure to Dubai World could be as high as $12 billion in syndicated and bilateral loans, including existing loans for Nakheel and Istithmar, an investment arm of Dubai's government, banking sources told Thomson Reuters LPC.

International banks are seeking to clarify their position as they formulate their response to the standstill request and are assessing the implications for lending to Dubai and the Gulf.

“This is very serious and will have implications across the region,” a senior banker said.

Sheikh Ahmed bin Saeed al-Maktoum, head of a top Dubai financial body, said he understood concerns in the markets and among creditors. “However we have had to intervene because of the need to take decisive action to address (Dubai World's) particular debt burden,” he said in a statement.

BONDS EXTEND LOSSES

In one of the first signs that Dubai's problems could hurt global fund-raising efforts for its neighbours, Saudi-backed Gulf International Bank pulled a bond sale due to price this week. Dubai's move will likely lead to a risk reassessment of debt issued by the region's sovereign-linked firms.

Ratings agency Standard & Poor's said on Thursday it had placed the ratings of four Dubai-based banks on negative outlook due to their exposure to Dubai World.

S&P's and Moody's Investors Service had already severely downgraded several government-related entities on Wednesday. Wednesday's announcement also sent the cost of insuring Dubai's debt against default soaring and bond prices tumbling.

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