Bank Shares in Freefall as Dubai Nears Default

Shares in London, led by the banking sector, fell dramatically today as traders digested the news that government-owned Dubai World has asked for an extension on its debt repayments. 

Dubai World has total debts of £35bn, 10% of which was due to be repaid next month.

This turn of events places the financial health of Dubai firmly in the spotlight. 

Banks will be scrambling to determine the extent of their exposure to Dubai.  As UK banks have struggled to rebuild their balance sheets, any potential for further large losses could prove very difficult for some.

Credit rating agencies have downgraded a number of state-owned entities, with Standard & Poors claiming that the request by Dubai World could be considered a default under their criteria.  While Standard & Poors cut ratings to one above junk, Moody’s cut ratings to junk status.

What is particularly worrying for the banks, is the lack of certainty at government level.

The request by Dubai World came just hours after the government raised $5bn via a bond issue.  Until very recently there had been reassuring noises eminating from Dubai about their ability to repay debt, but today’s announcement has shattered that illusion.

What will haunt markets further is the fact that Dubai is now effectively closed for business until December 6th due to Eid and a National Day, so further clarification on the emirate’s finances will not be forthcoming for over a week.

In London, the FTSE fell by 3%, while RBS and Barclays each fell by 8%.  The London Stock Exchange was also hit by technical issues which halted trading for over three hours, echoing a similar outage in September 2008.

The US market was closed for Thanksgiving, with American investors likely to have an uneasy holiday ahead of the market reopening.

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