Dubai may derail global recovery

New York - A loss of investor confidence due to the Dubai debt crisis could prove "disastrous" for the global economic recovery, even though potential losses are modest, Moody's ratings agency said on Monday.

The Dubai government announced Wednesday it was seeking a six-month moratorium on debt payments by flagship conglomerate Dubai World. The company has $3.5bn in debts arriving at maturity in a debt pile of $59bn.

"These are not insignificant amounts but I guess they are incredibly modest compared to the vast magnitude of losses faced by investors over the past two years of the global financial crisis," said Matt Robinson, speaking in an audio broadcast on Moody's Economy.com website.

In spite of the limited monetary value, the scope of the reaction by financial markets, which plummeted after the Dubai government announcement of the debt crunch, was the result of "fear of the government defaulting on it," he said, triggering "a reassessment of investors' risk tolerance."

If Dubai, one of the seven emirates of the United Arab Emirates, were to default on the debt, "it would be the biggest sovereign default since the Argentinian default in 2001," he said.

Robinson noted that markets were worried about a fire sale of Dubai World's foreign asset, especially those in Britain, "which could destabilize the embryonic recovery in the global commercial real estate markets".

In addition, Dubai's debt moratorium "raises the specter of multiple sovereign defaults in the region" in a domino effect that could dampen global investors' appetite for risk.

"The impact on investors' confidence could prove disastrous" and would most likely push global interest rates higher, undermining efforts to stimulate economies amid the global downturn, he said.

The Dubai crisis "at the very least reminds that the full impact of the financial crises might not be over."

- AFP