Stock Markets Tumble In Europe, Asia Upon News of Dubai Financial Ills

News that Dubai is facing financial ills have caused stock markets to tumble in Asia and Europe — and fears that Wall Street could follow suit.

The New York Times reports:

Stock markets fell across Asia on Friday as investors, spooked by news that Dubai was seeking to suspend some debt repayments, piled out of assets they considered risky.

The Hang Seng index in Hong Kong sagged 4.8 percent and South Korea’s key market gauge, the Kospi, fell 4.7 percent. The Nikkei 225 index in Japan and the Taiex in Taiwan dropped 3.2 percent. Banking shares were among the worst hit amid concerns about potential exposure to Dubai’s billions of dollars in debt.

Stock markets in Europe also headed lower during the morning, extending the falls they had suffered during the previous session. And Wall Street — which had been closed Thursday for the U.S. Thanksgiving holiday — was also set for a rocky day when markets reopen Friday.

The root of the latest turmoil was a surprise announcement on Wednesday from Dubai, one of the seven members of the United Arab Emirates, that it was asking banks to allow its main investment vehicle, Dubai World, to suspend its debt repayments for six months.

The announcement — the global high finance equivalent of a homeowner asking the bank to allow six months of skipped mortgage payments, presumably because the homeowner was out of cash — sowed fear of a contagion of instability that could roil markets that are only now recovering from the near cataclysm of the last year.

“This has sent shockwaves through the markets, even though the problems in Dubai have been known about for two years,” Emil Wolter, a Hong Kong-based strategist the Royal Bank of Scotland, said by phone from Paris.

The negative ripples from the news are also being felt in Europe, Reuters reports.

European shares fell further on Friday, a day after posting their biggest one-day drop in seven months, as concerns about contagion from Dubai’s debt crisis curbed investors’ appetite for riskier assets.

By 0922 GMT, the FTSEurofirst 3000 was down 0.3 percent at 984.99 points but trimmed earlier losses, having been down as much as 1.7 percent.

The index is up 53 percent from its lifetime low of March 9 and has gained 19 percent in the year-to-date.

Japan’s Nikkei hit a 4-month closing low on Friday, two days after Dubai, part of the oil-exporting United Arab Emirates, said it would ask creditors of state-owned Dubai World and Nakheel to agree to a standstill on billions of dollars of debt.

“We are facing day one after the ‘Dubai-shock’, but unfortunately this effect seems not to be over yet,” said Roger Peeters, strategist at Close Brothers Seydler.

“How will the U.S. market … react on the development in the Middle East? Perhaps the answer to this question will not be given today.”

But, most assuredly: U.S. markets won’t react positively.

UPDATE: The Wall Street Journal blog The Source:

It’s going to be another awful day for the banking sector. Analysts estimate European banks’ exposure to cash-strapped Dubai could be a whopping $40 billion.

The city-state’s largest corporate entity, Dubai World, asked creditors for a six-month standstill on debt repayments yesterday. The news sent shock waves around the globe, with the FTSE recording its biggest one-day loss since the first quarter of this year.

Banking analysts at NCB Stockbrokers said Standard Chartered is the British bank with proportionately the greatest exposure to the United Arab Emirates, with 7% of its loan book in the region. HSBC Holdings is reckoned to have about 2% of its loan book in the region, while Barclays, Royal Bank of Scotland and Lloyds Banking Group have less than 1% of their loans in the UAE, according to NCB analysis.

Experts have issued fresh warnings that there could be yet more bad news to come out of Dubai. And this is bound to make traders ultra jittery today.

UPDATE II: Paul Krugman:

As far as I can tell, there are three ways to look at it — three stories, if you like, about what Dubai means.

First, there’s the view that this is the beginning of many sovereign defaults, and that we’re now seeing the end of the ability of governments to use deficit spending to fight the slump. That’s the view being suggested, if I understand correctly, by the Roubini people and in a softer version by Gillian Tett.

Alternatively, you can see this as basically just another commercial real estate bust. Either you view Dubai World as nothing special, despite sovereign ownership, as Willem Buiter does; or you think of the emirate as a whole as, in effect, a highly leveraged CRE investor facing the same problems as many others in the same situation.

Finally, you can see Dubai as sui generis. And really, there has been nothing else quite like it.

At the moment, I’m leaning to a combination of two and three. For what it’s worth (not much), US bond prices are up right now, suggesting that the Dubai thing hasn’t raised expectations of default.

More reaction is HERE.