United Arab Emirate stocks tumbled 6-7 percent on Monday as the market reopened for the first time since Dubai called for a delay in repaying billions of dollars in debt, spooking global markets.
Banks and building stocks led declines in Dubai and Abu Dhabi as local investors got their first chance to react to last week's news that state-owned Dubai World and its main property subsidiary Nakheel wanted banks to delay debt repayments for six months.
Conglomerate Dubai World had $59 billion of liabilities as of August, most of Dubai's total debt of $80 billion that was racked up in transforming what was a sleepy fishing town into a booming regional center for finance, investment and tourism.
Global markets last week tumbled on concerns that Dubai's debt problems could provide the kind of knock-on effect that the collapse of Lehman Brothers caused at the height of the financial crisis last year.
Still, UAE stocks fell less than some analysts had initially feared, finding support from Asian stocks, which rallied to recoup some of last week's heavy losses.
The smaller-than-expected declines also followed a pledge by the UAE central bank to provide emerging support to the region's banks and an offer by Dubai's oil-rich neighbor, Abu Dhabi, to provide selective support to Dubai companies.
Investors are likely to hold on to their shares after a sharp sale last week as worries over the ripple-effect of Dubai's debt eased over the weekend, said Eddy Chen, a vice president at National Investment Trust Co Ltd in Taiwan.
There's a gradual realization that Dubai was an exceptional case and does not reflect the global economic situation.
In the Gulf, investors wanted reassurance that close to $60 billion in debt, most of it owed to local lenders, would be repaid.
Nakheel, the developer of man made islands in the shape of palms, asked for three of its listed Islamic bonds, or sukuk, on Nasdaq Dubai to be suspended until it is in a position to fully inform the market. The bonds were worth a total of $5.25 billion.
Abu Dhabi shares fell 7.1 percent in early trade and Dubai's benchmark slid 5.9 percent.
Banks bore the brunt of the selling as investors anticipated write-downs and loan provisions, while building companies also suffered on expectations of a deeper and more prolonged real estate slump that had fueled much of the emirate's growth, before the global financial crisis sent prices tumbling.
National Bank of Abu Dhabi PJSC, which said it had $345 million exposure to Dubai World Group, tumbled 9.7 percent.
The markets have been closed for the Eid al-Adha holiday since November 26 and other major markets in the region remained shut on Monday.
Analysts said the timing of the news on the eve of the Muslim Eid al-Adha holiday, the lack of prior communication with investors, and the scant details given on the payment delay plans had dented Dubai's credibility.
However, Dubai media and some business leaders said problems had been exaggerated and rallied to support the emirate's efforts to weather the crisis.
The government of Dubai has taken a hard look at the way Dubai Inc. operates, and will fix what has not worked, English-daily Khaleej Times wrote on Monday.
The need to restructure Dubai World is for real, and the decision to go ahead with it indicates maturity on the part of the emirate's decision-makers, the paper said in an editorial.
PICK AND CHOOSE
Abu Dhabi, the wealthy capital of the seven member United Arab Emirates federation, will pick and choose how to assist debt-laden neighbor, a senior Abu Dhabi official said.
We will look at Dubai's commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts, he told Reuters by phone on Saturday.
The action of the UAE central bank to allay concerns by setting up an emergency liquidity facility was viewed as a necessary but limited policy response.
International banks' exposure to Dubai World could be as high as $12 billion, banking sources told Thomson Reuters LPC -- a far cry from the $2.8 trillion in writedowns the International Monetary Fund estimates U.S. and European lenders will have to make between 2007 and 2010 as a result of the credit crisis.
Paul Schulte, a strategist at Nomura, said Asian exposure was utterly insignificant, with Indian banks and South Korean builders among the few companies likely to take a hit.
'DUBAI DROP' OVERDONE
With that in mind, investors jumped back into Asian stocks, pushing the MSCI index of Asia Pacific stocks traded outside Japan up 2.7 percent at 0600 GMT, while the Thomson Reuters index of regional shares was 2.5 percent higher.
Banks such as HSBC and Standard Chartered in Hong Kong, and Mizuho Financial and Mitsubishi UFJ Financial Group in Tokyo, led the rebound, as investors took heart from a better-than-expected showing in U.S. stocks when Wall Street reopened after Thanksgiving holiday.
Major U.S. indexes fell 1.4 to 1.7 percent on Friday, barely half the fall of major Asian indexes.
The market over-reacted on Friday, said Phillips Securities analyst Rock Lam.
Although Dubai World is extending its repayment period, it will not pose an impact on banks' earnings, he said.
The dollar and the yen weakened and commodity prices bounced as last week's risk aversion trades were unwound.
(Writing by Lincoln Feast; Editing by Neil Fullick)