The United Arab Emirates (UAE) offered banks emergency support today, the first steps to ease fears that a looming debt default by two of Dubai's flagship firms could derail the global economic recovery.
But the move to inject liquidity into Dubai's banks by the central bank of the Gulf Arab state, together with promises by neighbouring city-state Abu Dhabi to provide selective support to Dubai companies was seen as by analysts as the bare minimum.
Dubai markets, which are set to open tomorrow morning after a four-day holiday, are expected to fall by the maximum daily limit of 10 per cent as banks, property and construction firms face investor ire over moves to restructure the Dubai economy.
The action of the UAE central bank to allay concerns by setting up an emergency liquidity facility was viewed as a necessary, but minimal policy response.
Regional investors want any sort of guidance from the central bank or government ahead of the market open as rumours about the scope and origin of the crisis run rampant.
The supreme fiscal committee of Dubai met this evening to hammer out potential policy responses. But in the absence of concrete policy statements, doubt is likely to prevail.
The crisis began last week 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 has attracted celebrities and the super-rich.
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.
Investors are especially keen to discover whether the six-month "standstill" on debt repayments to Dubai World and Nakheel will be voluntary or involuntary. If creditors are not given a choice, the restructuring will be viewed as a default.
Abu Dhabi, the wealthy capital of the United Arab Emirates, will "pick and choose" how to assist debt-laden neighbour Dubai, a senior official said on Saturday.
"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," the official in the government of the adjoining emirate of Abu Dhabi told reporters.
Selective assistance for companies in "Dubai Inc.", a network of quasi-sovereign industries, instead of blanket assistance, would serve a rude awakening to investors. For years, many assumed that the conservative Abu Dhabi provided a safety net for its racier neighbour, which is known for its flashy nightlife and is home to the world's tallest building.
While around the world, politicians, central bank officials and corporate executives have lined up to express concern at the risks of the Dubai debt crisis hitting their own economies, leaders in the UAE have remained quiet or minimised any threats.
Local media, mostly owned or controlled by government-related entities or vested interests, initially ignored the gravity of the crisis and have now taken to criticising foreign media for blowing events out of proportion.
Dubai's depressed property market may see further price declines of around 20 per cent to 30 per cent and increased concern over the availability of finance after the emirate it delayed debt payments at two of its flagship firms, analysts said. Renewed job cuts could further hurt housing demand.
Investors around the globe have dumped stocks, bonds, currencies and commodities since the announcement, and sought safe havens in assets such as gold or the US dollar.
The sell-off began in Europe, spread to Asia and then the United States, whose markets were closed on Thursday for the Thanksgiving holiday. European markets dropped 3 per cent on Thursday but rebounded on Friday, while US stocks closed down 1.0 per cent on Friday in response to the Dubai news.