Gordon Brown sought to dampen concerns yesterday that the financial crisis in the Middle East, caused by the state-backed Dubai World's request for a standstill agreement on its debt repayments, would lead to widespread panic in global markets.
Speaking from Trinidad ahead of the Commonwealth summit, the Prime Minister said: "My own view is the world financial system is stronger now and able to deal with the problems that arise. While it is a setback, I think we will find it is not on the scale of previous problems we have dealt with. I think global recovery has depended on monetary action and fiscal stimulus."
Markets were rocked on Thursday when Dubai World, a state-backed holding company, asked lenders for a six-month moratorium on $4bn of repayments due next month. The request came on the eve of Eid al-Fitr, a three-day holiday, leaving Western lenders in a state of flux. While markets yesterday recovered some of the lost ground, Dubai's credit default swaps – the cost of insuring bonds and an indicator of how risky the market judges them to be – continued to widen. The cost of insuring $10bn worth of Dubai's bonds jumped to $541,205 yesterday, up from just $318,705 on Tuesday.
Michael Geoghegan, the chief executive of HSBC, indicated that he expects Dubai's oil-rich neighbour Abu Dhabi to rescue Dubai World. Such a move would justify the massive push made in the region by the UK's biggest banks, which are the biggest lenders in the UAE. UK banks have claims of $50.2bn on debtors in the country, out of a total of $123bn, according to the Bank of International Settlements.
"I am confident that the leadership of Dubai and the UAE will overcome any short-term issues they face, which appear to have been somewhat sensationalised," said Mr Geoghegan.
According to analysts at JP Morgan, RBS, the 84 per cent taxpayer-owned bank, has arranged about $2.28bn of the loans and bonds for the troubled Dubai World in the last three years. Typically banks would hold 10 to 20 per cent of the deals they arrange. An RBS spokesman declined to comment.
Barclays also refused to comment on its lending to the company. League tables provided by the data group Dealogic, which ordinarily the banks are desperate to top, show that Barclays Capital, the investment banking arm of the group, is currently one of the most active underwriters of debt issued by Dubai entities. Meanwhile, HSBC said net loans to customers in the UAE stand at $15.9bn, 1.7 per cent of the bank's total loan book.
The 43 per cent taxpayer-owned Lloyds Banking Group, which in the past has typically lent more to domestic borrowers, also declined to comment. According to research issued by the Emirates Banks Association, Lloyds has only $1.6bn exposure to the whole UAE. Standard Chartered also refused to provide figures on investments in Dubai. A commercial real-estate book of $400m in Dubai was detailed in the bank's interim results.
Despite Mr Brown's efforts, the world's stock markets remained under pressure, though the panic seen on Thursday subsided. Asian markets slumped overnight as Hong Kong's Hang Seng fell more than 5 per cent and Japan's Nikkei was 3 per cent lower. The effects on London were immediate: the FTSE 100 index tumbled another 1.5 per cent, on top of the previous day's 3.2 per cent drop, wiping almost £44bn from blue-chip stocks. But the market recovered its poise later in the day, as expectations of a rescue by Abu Dhabi strengthened and better guesses of the UK banks' exposures emerged. The US equity markets fell by as much as 3 per cent on opening, but much of this was a delayed reaction, as they were closed for Thanksgiving on Thursday. RBS was nursing losses of 7 per cent at one stage. But RBS recovered during trading later to end up on the day. Standard Chartered was slightly down.