Brown seeks to ease Dubai debt worries

LONDON: Gordon Brown sought to dampen concerns yesterday that the financial crisis in the Middle East, caused by the state-backed Dubai World's request for a standstill agreement on its debt repayments, would lead to widespread panic in global markets.

Speaking from Trinidad ahead of the Commonwealth summit, the Prime Minister said: "My own view is the world financial system is stronger now and able to deal with the problems that arise. While it is a setback, I think we will find it is not on the scale of previous problems we have dealt with. I think global recovery has depended on monetary action and fiscal stimulus."

Markets were rocked on Thursday when Dubai World, a state-backed holding company, asked lenders for a six-month moratorium on $4bn of repayments due next month. The request came on the eve of Eid al-Fitr, a three-day holiday, leaving Western lenders in a state of flux.

While markets yesterday recovered some of the lost ground, Dubai's credit default swaps – the cost of insuring bonds and an indicator of how risky the market judges them to be – continued to widen. The cost of insuring $10bn worth of Dubai's bonds jumped to $541,205 yesterday, up from just $318,705 on Tuesday.

UK banks have claims of $50.2bn on debtors in the country, out of a total of $123bn, according to the Bank of International Settlements.

According to analysts at JP Morgan, RBS, the 84 per cent taxpayer-owned bank, has arranged about $2.28bn of the loans and bonds for the troubled Dubai World in the last three years. Typically banks would hold 10 to 20 per cent of the deals they arrange. An RBS spokesman declined to comment.

Despite Mr Brown's efforts, the world's stock markets remained under pressure, though the panic seen on Thursday subsided.

Asian markets slumped overnight as Hong Kong's Hang Seng fell more than 5 per cent and Japan's Nikkei was 3 per cent lower. The effects on London were immediate: the FTSE 100 index tumbled another 1.5 per cent, on top of the previous day's 3.2 per cent drop, wiping almost £44bn from blue-chip stocks. But the market recovered its poise later in the day, as expectations of a rescue by Abu Dhabi strengthened and better guesses of the UK banks' exposures emerged.