Dubai debt woes jolt world financial markets

Financial markets worldwide were rocked Thursday after the government of Dubai announced a reorganization ofits debt-laden economic development agency.

Stocksin Londonfell almost 5.5 per centwhile exchanges in France and Germany dropped more than two per cent. In Asia, China's Shanghai index tumbled 3.6 per cent andHong Kong's Hang Seng was off 1.8 per cent.

U.S.markets were closed for American Thanksgiving, but the Toronto Stock Exchange followed the downward trend. ThebenchmarkS&P/TSX composite index lost 200.1 points to11,436.8, whilethe Canadian dollar fell 1.35 centsto 94.30 cents US.

Gold, meanwhile,closed in on $1,200 US an ounce, trading up $5.80 to $1,192.80 as investors looked for solidity.

The global stock slump wasin response to Wednesday's surprise announcement of an overhaul ofDubai World,the state-run organizationthatholds almost three-quarters of the Middle Eastern country's total debt. As part of the restructuring, DubaiWorld's creditors were asked to hold off on requiring debt repayments until at least May 30, 2010.

Dubai World, which has piled on $59 billion US in borrowing to fund the small nation's hyper-expansion, was supposed torepay $3.5 billion inDecember.

The debt repayment moratorium threw into question the company's ability to repay its debt. Therestructuring process, which also includes property development firm Nakheel,sharpened investor concern about European and Asian banks that lent to Dubai World.

"Certainly the Dubai debt debacle and the uncertainty that it has created has had a severe knock-on effect," said David Buik, markets analyst at BGC Partners in London.

Dubious asset values

For years, Dubai World was at the forefront of Dubai's international expansion into port operations, hotels and other assets. Slumping real estate markets in manycountries combined with the overall economic recession, however, killed the organization's financials and led to the restructuring.

Some estimates put European banks on the hook for as much as $40 billion in lending to Dubai World, money that could be at risk if the government corporation slips into some sort of court-sanctioned bankruptcy proceeding.

HSBC, Standard Chartered, Barclays and Royal Bank of Scotland's ABN Amro, which were hammered in 2008's financial drop, could now face problems in a Dubai World restructuring, analysts said.