THE HAGUE -- The fate of state-run Dubai World grew more muddled Monday, after the government of Dubai said it would not guarantee the massive debt run up by the company as it built sprawling complexes of six-star hotels and soaring modern office towers in the desert sands.
The declaration reignited worries of a massive debt default in the once-glittering United Arab Emirates and sent stocks plunging in the Middle East on Monday while continuing to weigh down markets across Europe.
Dubai World announced last week that it was seeking to postpone payments on almost $60 billion in debt. Any restructuring of those loans would technically not be a sovereign debt default because Dubai World is a government-operated company, and not the government itself. But the move nevertheless chipped away at the notion of implicit public guarantees for such investments.
The nation's troubles underscored the struggles facing a host of other countries that also had debt-fueled economic expansions over the past decade -- including Greece, Hungary and Vietnam.
Public-debt problems
While nations such as China and Brazil blaze a trail back to rapid growth, some large, wealthy nations such as Britain are facing potentially severe fiscal challenges as tax revenues plummet and spending soars to fund massive stimulus packages. To help pay the bills, the British government is already moving to sell off vast asset holdings -- including its stake in the high-speed rail line linking London and Paris under the English Channel.
The crisis in Dubai is "a harbinger of what's to come: The focus will move from the fiscal situation of the private sector to the public sector," said Simon White, a partner at Variant Perception, a research firm in London. "People see the problem in Dubai and go: 'Okay, Dubai isn't an isolated case. Sovereign debt crises tend to cluster: Now they want to know what's going on in Greece; in Spain; in the Baltics, especially Latvia."
Though the United States and Japan have also run up big fiscal deficits, concern is centering largely on smaller nations with less resources to cover their tab.
In Greece, for instance, the new Socialist government revealed last month that the budget deficit is twice as big as previously disclosed, and the cost of new borrowing there jumped after Dubai's announcement. On Monday, Finance Minister George Papaconstantinou acknowledged growing debt concerns, telling the BBC that Athens was working to correct "a lack of credibility."
A ripple to Europe
Many observers look to the newly flush International Monetary Fund , or wealthy neighbors such as Germany, to step in and aid nations such as Greece before their situation goes critical. Yet any such moves are bound to trigger at least some market panic initially, and analysts remain concerned over at least partial defaults in some countries.
That could pose fresh problems for major global financial institutions, many of which are just now recovering from the financial crisis. Worries that the fallout from Dubai may deal another blow to European banks in particular sent markets down from London to Frankfurt on Monday. Already hard-hit British bank stocks appeared to be the most exposed, with Lloyds Banking Group dropping 5.9 percent and the Royal Bank of Scotland, Barclays and Standard Chartered all falling 1.9 to 4.5 percent on Monday.
Analysts said U.S. banks appeared to have more limited exposure but did not rule out that some may take fresh write-downs. Trading was flat for the day, with the Dow Jones industrial index up just 0.34 percent.
If U.S. banks were more exposed, "the Dow would be down 5 percent, and it isn't happening," said David Buik, analyst at BGC Partners in London. "We all understand the domino effect, but I don't think this is happening. I think this is an unfortunate public relations exercise by Dubai."
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