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Dubai debt woes 'a drama, but no crisis'

By Hilary Whiteman, CNN
  • Experts say Dubai World's debt problems won't lead the global economy back into recession
  • Dubai stunned global investors by calling for a debt "standstill" for Dubai World and Nakheel
  • NEW: U.S. markets close down, although light trading exaggerated any volatility
  • Nakheel is Dubai World's real estate arm, owns "The Palm Islands," and "The World"

London, England (CNN) -- Market experts say the debt revelations from Dubai this week will not lead the global economy back into recession, but have seriously damaged the Emirate's standing as a leading financial hub.

The Dubai government caught investors off-guard late Wednesday by announcing it was asking creditors for a six-month moratorium on the debt repayments of Dubai World and Nakheel, one of its biggest holding companies and its real estate arm.

The U.S. stock market opened lower on Friday as traders seized their first chance to respond to the news after the Thanksgiving holiday. Read more about the market reaction

The Dow closed 153 points down while Nasdaq and the S&P lost 1.7 percent, although although light trading -- markets were only open half-a-day due to the holidays -- exaggerated any volatility in markets.

European markets closed higher after recouping earlier losses. Earlier, Asian markets fell amid worries about the impact of Dubai's debt problems elsewhere.

"It's so easy to jump onto the gloom and doom bandwagon over this," Stephen Pope, Chief Global Equity Strategist at Cantor Fitzgerald told CNN.

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"It might slow the pace of recovery for a while but I don't think it's going to be one of these cataclysmic moments that suddenly means equities fall of a cliff and means that the economy turns south once more," he said.

In a note to clients, Howard Wheeldon, senior strategist at BGC Partners, said the fallout from Dubai World's debt problems should be measured in days, not weeks.

Explainer: What is Dubai World?

"Although we have known the extent of the potential Dubai problem for many months and seen asset values in Dubai fall by 50 percent in some cases, we also need to remember that we are essentially talking about a private company that is 100 percent owned by the Dubai government -- not the other way round," he wrote.

He added: "Zilch marks for communication skills on the part of the Dubai authorities -- don't look at this as anything more than a problem that will mostly be resolved in the Middle East."

Read CNN's John Defterios' take on the Dubai debt fears

For more than a decade, Dubai has set a new standard for pace of development. Cranes have dominated the skyline in a rapid flurry of building to establish the Emirate as not only a financial center, but a leading tourism hub.

Long ago, the Emirate's ruler recognized that it would have to find another source of income as its oil reserves were depleted.

Pope told CNN the timing of Dubai's statement has once again highlighted the lack of transparency in the Emirate's financial dealings.

If somebody presents you with a gift horse, you have a damn good look in his mouth
--Stephen Pope

The call for a debt freeze came after a series of high-profile glamorous events. Just last week, Dubai hosted the Dubai World Championships, the climax of the inaugural Race to Dubai, one of the world's richest golf competitions.

"If you can turn around and look at wonderful progress Dubai made -- it's a bit like a gift horse. The one lesson that you learn here is that, if somebody presents you with a gift horse, you have a damn good look in his mouth," Pope said.

He said that is exactly what the leading ratings agencies should have been doing.

"Where were the rating agencies -- why is it they react after the event? They didn't this before with the subprime issue now they're doing it again," he said.

"All the time, we've got politicians and wise men pointing fingers at bankers and saying they're the wicked ones. Perhaps we should turn around and look at rating agencies and say what the devil are you doing?"

Fact Box
Dubai is one of seven emirates which make up the United Arab Emirates.

Located on the southern coast of the Persian Gulf it is 3885 square kilometers in size and has a population of 1,758,244.
It is ruled by Mohammed bin Rashid Al Maktoum. The Al Maktoum family has ruled Dubai since 1833. It is the fastest growing city in the world.

After the Dubai government announcement, ratings agencies Standard & Poors' and Moody's downgraded their ratings on a number of Dubai's largest companies, including DP World and the Jebel Ali Free Zone.

They both said their response reflected Dubai's announcement on the restructuring of Dubai World.

Farouk Soussa, Head of Middle East Government ratings at Standard & Poor's, told CNN the agency had been flagging issues about the debt burden of Dubai World and Nakheel since April.

"The fact that they are having difficulty repaying this debt is not news, it is not a surprise. What is more of a surprise is that the government of Dubai has not stepped in to help them out," Soussa said.

He said Standard & Poor's downgraded the likelihood of government support for Dubai's struggling companies back in June, and again on Wednesday, but analysts were working in an "information vacuum."

"The question of support is really the million dollar question. Very little has been said by the government specifically on this question throughout the last year," he said.

"In an opaque policy environment, what people have had to do is make assumptions regarding government support -- and clearly those assumptions were too high."

Few analysts expect Dubai to allow Dubai World to fail. It would come at too great a cost to the region.

"I don't think any of the gulf states would be very impressed if you were to see a high profile glitzy glamorous player fail in this way. It doesn't create the impression that the region wants to have," Pope said.

But for Dubai, he says the damage has been done.

"This drives a big hole into Dubai's ambitions of being the regional financial center because there's no shortage of other contenders for that," Pope said.

"Bahrain would like to have that mantle back again, Qatar is building up very aggressively there and is of course is seen as being one of the main players."

"And Saudi Arabia has been touting Jeddah as regional hub, so there's no shortage of competitors who could take that role away from Dubai," he said.