Dubai's ruler looked to calm panicky investors Tuesday with a message that all was well in the glitzy city-state after the largest government-owned company shook global markets by saying it needed to delay payments on its $60 billion in debt.
Dubai World, one of the government's chief investment arms, has stakes in holdings ranging from luxury retailer Barney's New York to a grandiose six-tower hotel-entertainment complex in Las Vegas. In its first statement since revealing its debt problems last Wednesday, the conglomerate said it had started negotiations with creditors on restructuring some of its debt.
Dubai is one of seven highly autonomous statelets that make up the United Arab Emirates and the UAE's two biggest markets tumbled for a second straight day. The Dubai Financial Market sank 5.61 percent on Tuesday after plunging 7.3 percent on Monday and neighboring Abu Dhabi's bourse closed down 3.57 percent following an 8 percent slide a day earlier.
In his first public statement on the crisis, Dubai's ruler, Sheik Mohammed bin Rashid Al Maktoum, tried to contain the damage with reassuring words.
"Our economy is strong and solid and consistent," he told Al-Arabiya satellite television. He blamed the media, saying it fueled the market angst with doomsday reporting of the conglomerate's crisis _ comments unlikely to shore up confidence in his stewardship of the emirate.
Any comfort from the latest statements was likely to be overshadowed by uncertainty over how Dubai would tackle its debt mess. Analysts say the crisis is symptomatic of a broader malaise in Dubai. Unlike Abu Dhabi, the oil-rich neighbor that serves as the seat of the UAE's federal government, Dubai lacks oil wealth, and its propensity to spend big using the cheap credit available over the past few years, means it has leveraged itself to the hilt.
For the past decade, Dubai has promoted itself as a freewheeling boomtown, racking up debt as it built extravagant artificial residential islands, malls complete with indoor ski slopes and the world's tallest tower. Such holdings, along with a massive push in infrastructure development, helped both Dubai World and Dubai build up a combined debt-load which Moody's Investor's Service estimates could be as high as $100 billion.
The largest of Dubai's companies, including Dubai World, are government-owned, and beneath the veneer of Westernization that makes it unique in the conservative Gulf Arab region is the understanding that the spirit of liberalism ends when it comes to criticizing the government and its plans.
Now Dubai, and by extension the United Arab Emirates, must find a way to climb out of its financial hole while retaining credibility as an international investment haven.
With no oil money to fall back on, Dubai World's potential for a debt default sent jitters through world markets. It stoked fears that despite the start of a global economic recovery, some governments in developing country could still run into problems paying their debts.
There were also concerns in international markets that, at a time when they are starting to emerge from the global financial crisis, a default by Dubai World could hammer international and Emirati banks that loaned the company money.
However, with the UAE central bank providing support, it looks as though the risk of contagion has so far been minimized.
The central bank stepped in earlier this year buying half of a $20 billion bond tranche issued by Dubai. It has also pledged to back local and foreign banks in the country. Those moves were clearly aimed at showing that the UAE is still a sound place to invest, despite Dubai's problems.
"In the long term, the bigger issue is how people are going to perceive Dubai and Abu Dhabi," said Hani Sabra, Middle East expert with the New York-based consultancy Eurasia Group. "At this point, it's clear they don't perceive Dubai and Abu Dhabi as different."
"The big thing is the perception of the UAE overall, and I think there will be more forthcoming commitments from Abu Dhabi to calm investor fears," said Sabra.
A lack of substantive comments by Abu Dhabi officials further unsettled investors and the markets, raising even more questions whether Dubai's oil-rich neighbor would step in with a bailout.
And even if Abu Dhabi did step in, that raised questions about whether it would nip Dubai's wings by requiring that Abu Dhabi sign off on future projects.
Dubai World announced Tuesday that it had begun negotiating a debt restructuring that would include about $6 billion in Islamic bonds issued by its real estate arm, Nakheel, the company behind Dubai's iconic, palm-shaped artificial islands. About $3.5 billion of the bonds come due on Dec. 14, and Nakheel was viewed as the litmus test for how the company would deal with its debt woes.
It did not address the broader issue of how it would meet its entire crushing debt burden.
Dubai World said the restructuring would include Dubai World and certain subsidiaries including Nakheel, but exclude debts from Infinity World Holding, Istithmar World and Ports & Free Zone World. That subsidiary includes ports and terminal operator DP World, Economic Zones World, P&O Ferries and Jebel Ali Free Zone, which on Tuesday said it paid a roughly $2 billion Islamic bond on time.