European banks were hit by concern about potential exposure to debt problems in Dubai on Thursday, while companies where Middle Eastern investors own big stakes also came under pressure.
Dubai, whose extravagant building projects have been largely put on hold since the start of the global financial crisis, said on Wednesday it would ask creditors at its flagship firms Dubai World and property developer Nakheel to delay repayment on billions of dollars of debt.
By 1230 GMT on Thursday the DJ Stoxx European bank index <.SX7P> was down 3.3 percent at 222 points, putting it on track for its biggest daily fall since June.
Companies with significant Middle Eastern shareholders, such as the London Stock Exchange
The worry is about the exposure of the banks given the rapid pace of expansion in Dubai and around the area in the last few years, said one bank analyst, who asked not to be named.
Among the biggest fallers were HSBC
They were among nine banks who were bookrunners on an outstanding $5.5 billion syndicate loan to Dubai World in June 2008, according to Thomson Reuters LPC data. Banks may have sold down or increased their loan exposure in the secondary market, and one analyst estimated that bookrunners typically retain only about 10-15 percent of a loan or bonds.
HSBC, RBS and Lloyds all declined to comment. ING said it had a negligible exposure to Dubai World bonds and saw no reason to divert from current guidance on risk costs for next quarters.
Other bank shares under pressure included Deutsche Bank
Trading in UK stocks was halted at about 1100 GMT due to a technical problem at the London exchange.
The worries also hurt sterling. There are concerns regarding the extent of the exposure of the UK banks to Dubai, hence sterling is coming under pressure, said Ian Stannard, currency strategist at BNP Paribas.
Dubai said on Wednesday that the delayed repayment of debt was a first step toward restructuring Dubai World, the conglomerate that spearheaded the emirate's breakneck growth.
The news has sent the cost of insuring Dubai's debt against default soaring and bond prices tumbling. State-run Dubai World has $59 billion of liabilities, its subsidiary Nakheel said in August, a large proportion of Dubai's total debt of $80 billion.
This was a surprise to all bankers, and probably to the management of DW as banks had been progressing well with refinancing discussions, a senior loans banker active in the Gulf said on Thursday.
It sounds like a political decision taken right at the top which has caused Dubai immense PR damage. This is very serious and will have implications across the region, he said.
Shares in the LSE dropped as much as 8.8 percent to 742.5 pence, on worries that 22 percent shareholder Borsa Dubai might sell down its stake.
German carmaker Porsche
Everything that is in Arabian hands is getting sold at the moment, said a Frankfurt-based trader.
Luxury auto peer Daimler
The U.S. market is closed for the Thanksgiving holiday on Thursday, which could add to volatile market conditions.
(Additional reporting by Mark Potter in London and Gilbert Kreijger in Amsterdam; Editing by Andrew Callus, Mike Peacock and Erica Billingham)