Stock markets in Dubai and Abu Dhabi plunged on Monday as a top finance official stoked fears the government is washing its hands of the Dubai World debt problem, saying it does not guarantee the firm.
However US stocks rebounded on news that the flagship Dubai World group will restructure some 26 billion dollars in debt of some of its companies, easing default fears.
Dubai's benchmark DFM Index closed down 7.3 percent from Wednesday, just before Dubai announced it wanted to freeze debt repayments by Dubai World for at least six months.
Leading securities, particularly in the construction and finance industries, plummeted by almost the maximum-allowed limit of 10 percent after the bourse reopened following a four-day holiday.
The market in neighbouring oil-rich Abu Dhabi dropped 8.31 percent.
In a statement late on Monday, Dubai World said it will restructure part of the group, including property arm Nakheel. Related article: Dubai World facts.
One of the key loans affected by Dubai World's planned debt moratorium is a Nakheel issue of 3.5 billion dollars of sukuks, scheduled to mature on December 14.
"Following a detailed review of the Group's liquidity and capital structure, Dubai World has concluded that it should immediately consider alternatives in respect of the debt obligations of certain entities within the Group," it said.
"The proposed restructuring process will only relate to Dubai World and certain of its subsidiaries including; Nakheel World and Limitless World.
"The total value of debt carried by the companies subject to the restructuring process amounts to approximately 26 billion dollars, of which approximately 6 billion relates to the Nakheel sukuk" or Islamic bond, the statement said.
After spending most of the session in the red, the Dow Jones Industrial Average rebounded late in the session, gaining 36.88 points (0.36 percent) to 10,346.80 at the market close.
Earlier, a top finance official stoked fears that the Dubai government was washing its hands of the Dubai World debt problem, saying it does not guarantee the company.
"It is true that the government is the owner, but as the firm has several activities and exposed to different sorts of risks, the decision was from the day of its establishment that the company would not be guaranteed by the government," Dubai Department of Finance head Abdulrahman al-Saleh said.
He said, however, in an interview with state television that the reaction to the government's announcement last week was "exaggerated and unjustifiable."
The Dubai and Abu Dhabi markets have shed around 10 billion dollars of their market capitalisation.
Trading almost froze in both markets on Monday, with heavy sell orders and almost no offers to buy.
The markets go into another four-day holiday starting Wednesday.
In Dubai, the shares of giant property developer, Emaar, took a severe beating, shedding 9.86 percent, while Dubai Islamic Bank lost 9.96 percent.
Other sectors were also affected, with the shares of the budget airline Air Arabia plunging by 9.62 percent.
Securities listed by port operator Dubai World unit DP World fell 14.88 percent on NasdaqDubai exchange and were the most active, according to NasdaqDubai website.
Investors failed to draw reassurance from the UAE central bank's announcement on Sunday that it was providing additional liquidity to banks in the United Arab Emirates.
European stock markets fell more than 1.0 percent on Monday on lingering jitters over the Dubai debt crisis after Asian exchanges rallied.
In London the FTSE 100 index tumbled 1.05 percent to close at 5,190.68 points while in Paris the CAC 40 fell 1.11 percent to 3,680.15. The Frankfurt the Dax gave up 1.05 percent to finish at 5,625.95 points.
Moody's rating agency said on Monday Dubai's debt problem will not affect the credit quality of the Abu Dhabi and UAE governments thanks to the country's strong foreign assets and Abu Dhabi's oil wealth.
Standard and Poor's, however, put Abu Dhabi Commercial Bank, in which the Abu Dhabi government holds a 64-percent stake, under negative credit watch because the bank was heavily exposed to Dubai World property.
Dubai's announcement sent shockwaves around the world on Thursday and Friday as investors feared a possible default by Dubai and its state-owned businesses, which together owe an estimated 80 billion dollars.
Asian markets recovered on Monday, with Hong Kong surging 3.25 percent and Tokyo soaring 2.91 percent.
Dubai and Abu Dhabi were the only Gulf stock markets open on Monday. Kuwait follows on Tuesday and Saudi Arabia's financial market, the largest Arab bourse in capitalisation, will remain on holiday until Saturday.
Source: AFP Global Edition