Shares markets gripped by Dubai debt uncertainty

Worries over Dubai's debt problems have rattled Europe's share markets for a second day running.

The main share indexes in London, Paris and Frankfurt all opened more than 1% lower before recovering.

The moves followed news from the state-owned Dubai World that it would delay repaying some of its debt.

UK Prime Minister Gordon Brown described the fall in the markets as a "setback" but said it was "not on the scale of previous problems".

"The world financial system is stronger now and able to deal with the problems that arise," he told reporters on his way to a Comonwealth leaders summit.

Earlier, Asia's markets had fallen sharply. Tokyo's benchmark Nikkei fell 3.2% to 9,081.52. In Hong Kong, the Hang Seng index ended down 4.84% at 21,134.5.

Dubai World is the centrepiece of the Gulf state's economy. David Buik, senior partner at BGC Partners, said: "You can't just say to the world: 'I don't want to pay my debts'. There is no income coming in from any of these properties. I think this is shocking PR."

Holiday hiatus

The news shook markets that are recovering from the collapse of the US housing market and contagion that threatened to rupture the global financial system last year.It was the timing of the announcement as much as the lack of clear information that heightened nerves. The first news emerged late on Wednesday, as the Muslim world was preparing for its Greater Eid celebrations.

It also coincided with the closedown of the world's most important share market, with US markets winding down for Thursday's Thanksgiving holiday.

Uncertainty of the scale of banks' exposure to Dubai hit banking shares at first. However, bank shares recovered strongly throughout Friday morning.

Threat to confidence

The biggest underlying fear is that Dubai's problems could reignite the international financial turmoil of the credit crisis.

Chris Skinner, chairman of the Financial Services Club, said: "We're very heavily interlinked. Dubai is the key financial centre in the Middle East."

Any knock to economic confidence could lower global demand for a whole range of commodities, including oil.

Oil prices have dropped sharply. US crude fell 5% to $74.23 a barrel and London Brent Crude was down $1.47 to $75.42.

Dubai, which has less oil money than many of its neighbours, became a trading and tourism hub with global ambitions.

Dubai World, the conglomerate that led the emirate's expansion, had $59bn (£36bn) of liabilities as of August, a large proportion of Dubai's total debt of $80bn. Its subsidiary Nakheel was the builder of the landmark palm tree-shaped island developments off Dubai.