The Dubai government said on Monday it was not responsible for the debts of Dubai World, dealing a blow to creditors' assumptions that the Arab emirate would guarantee the conglomerate's liabilities.
Creditors need to take part of the responsibility for their decision to lend to the companies, said Abdulrahman al-Saleh, director general of Dubai's Department of Finance. They think Dubai World is part of the government, which is not correct.
In its first statement since the crisis began, Dubai World, the government-controlled holding company at the heart of the storm, said a restructuring would involve $26 billion in debt and mostly affect its property firms, Nakheel and Limitless.
Other firms, such as DP World, Jebel Ali Free Zone and Istithmar World would not be included in the restructuring because they were financially stable, it said in a statement released by e-mail late on Monday night.
The previously unreleased figure of $26 billion may help markets to grapple with the scope of the crisis following estimates that the restructuring could affect $59 billion or more in liabilities.
United Arab Emirates stocks plunged on Monday as investors waited for clarity on Dubai's request for a delay until May 2010 on repaying billions of dollars in debt issued by Dubai World and its Nakheel unit, developer of three distinctive palm-shaped islands in the emirate.
European shares fell as investors worried about sovereign financial crises, with the FTSEurofirst 300 off 1.4 percent. But the U.S. dollar fell against the euro after the United Arab Emirates promised liquidity, easing worries about default.
Saleh's remarks in an interview to Dubai TV, a station owned by the ruler of Dubai, came after UAE markets closed.
They have confirmed there is going to be a restructuring and are doing what they can to differentiate between the government and companies, said Mohieddine Kronfol, managing director at Algebra Capital.
It doesn't take away from the fact that you have a major potential event that is unraveling. People's expectations aren't going to be met with this announcement.
The UAE's central bank pledged financial support, helping to steady global markets.
The central bank promised additional liquidity to local banks and an official in Dubai's oil-exporting neighbor, Abu Dhabi, said on Sunday it would offer selective support to Dubai firms.
Without referring directly to the Dubai World debt problems, the UAE's central bank governor said on Monday there was no cause for concern about local banks, which he said had proven themselves able to weather the global crisis.
I have advice for foreign investors. They should study available investment opportunities and conduct realistic feasibility studies to make sure they are real opportunities with no risk, the state news agency WAM quoted Sultan Nasser al-Suweidi as saying.
Michael Ganske, head of emerging market research at Commerzbank in London, said a default, which could ultimately benefit the region, is becoming more likely.
At the end of the day it should be positive for Dubai, Dubai's sovereign risk should go down, he said.
Dubai World -- which had $59 billion of liabilities as of August -- shocked investors last week with news of the standstill request while it restructures, along with its property developer Nakheel. The agreement would affect about $5.7 billion of debt due to mature before the end of May.
Nakheel earlier on Monday asked for three of its Islamic bonds, worth a total of $5.25 billion, to be suspended on Nasdaq Dubai until it was in a position to fully inform the market.
Saleh made clear on Monday that while the government owned Dubai World, the conglomerate had long operated as a stand-alone entity and was never guaranteed by the emirate's government.
It deals with all parties on this basis and it borrows based on ... its projects and not the guarantee of the government, Saleh said.
When contacted by Reuters and asked whether Dubai could still repay its Nakheel bond, Saleh declined to comment.
The head of a Dubai budget committee said the government's own debt was $10 billion. Dubai government's debts have been declared. They are only 10 billions. There should be no confusion between (the government) and any company, Dhahi Khalfan Tamim, also Dubai's police chief, told Al Arabiya television.
Dubai World Chairman Sultan Ahmed Bin Sulayem also declined to comment on Monday. Other Dubai World officials could not immediately be reached.
John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole Group, said the distinction between the Dubai government and the flagship company appeared minimal.
What role does the sovereign play? This continues to create uncertainty, he said from Riyadh. Their motivation is to make a distinction between the two, but the difference ... is nebulous.
Saleh said he believed the market reaction to last Wednesday's announcement by Dubai World, which initially shook global financial confidence, was exaggerated.
The restructuring is a wise decision that is in the interest of all parties in the long-term but might bother creditors in the short term, he declared.
(Additional reporting by Raissa Kasolowsky, John Irish in Dubai and Carolyn Cohn in London; Writing by Amran Abocar and Firouz Sedarat; Editing by Alistair Lyon, John Stonestreet, Kenneth Barry and Dan Grebler)