British bank shares fall as much as 8% on Dubai debt mess

Submitted by cpowell on 10:28AM ET Thursday, November 26, 2009. Section: >http://business.timesonline.co.uk/tol/business/markets/article6933664.ec...

Almost L44 billion was wiped off London's biggest companies today amid growing fears the UK financial sector could be heavily exposed to Dubai World, the state-owned conglomerate that yesterday asked for a standstill on its $60 billion (L36 billion) debt pile.

The FTSE 100 tumbled 170.68 points or more than 3 per cent to 5194.1 in its biggest one-day percentage fall since the market plunged to six-year lows in March.

Investors had been hoping the British financial sector had worked through much its toxic debt, which included exposure to America's sub-prime mortgage market.

However, Credit Suisse estimates that European banks are exposed to about half of Dubai's $80 billion borrowings, naming Barclays and Royal Bank of Scotland (RBS) as the UK lenders most at risk from the Emirates' worsening debt problems.

The emergence of Dubai's financial problems now raises fears UK banks could face more writedowns on bad debts, and chimes with warnings this week from Dominique Strauss-Kahn, the managing general of the International Monetary Fund, who said that global banks had worked through only half their toxic assets since the banking crisis broke two years ago.

Today, RBS, which is 70 percent owned by the UK taxpayer, fell 7.8 per cent, wiping off L1.73 billion of its market value. Barclays lost 8 per cent, cutting its capitalisation by L2.65 billion, Standard Chartered dropped 5.8 per cent, losing L1.9 billion. HSBC fell 4.8 per cent, losing L6.2 billion of its value, and Lloyds Banking Group lost 5.6 per cent, wiping off L1.5 billion.

In London, the FTSE 100 began its decline this morning before trading on the London Stock Exchange was halted for 3 1/2 hours due to a "technical hitch."

When trading resumed at 2 p.m., the leading index of blue chip shares lost 136.99 points to 5,227.10. The London Stock Exchange also saw its stock fall, losing 5.34 per cent to 771p, on fears the state-owned Borse Dubai could sell its 22 per cent stake in the FTSE 100 company.

In France, the CAC index and in Germany the DAX both nursed falls of more than 3 per cent. America's Dow Jones industrial average is closed today for Thanksgiving.

One London trader said: "Dubai is weighing heavily on the market. It has its fingers in so many pies that it could have a contagion effect and there are concerns another country could have problems on the back of this."

He added that today's activity was very similar to when Lehman Brothers collapsed, warning that Dubai's problems could be the catalyst for the market to fall further.

Dubai World owns Nakheel, the property developer responsible for the Palm Jumeirah, home to the likes of David Beckham and Brad Pitt.

Following Dubai's request of a standstill on Nakheel's debt, there are concerns it will not be able to continue developing the Palm and neighbouring projects, leaving Dubai and its coastal waters an ugly, unfinished construction site.

Work has stopped on several major projects around the city and companies have had to accept huge cuts in the value of their contracts. More than 400 projects worth more than $300 billion are said to have been cancelled or shut down as a result of the property collapse.

Recent reports claimed that British companies were owed L200 million by Dubai's government-owned companies, but some analysts put the total figure much higher.

"The bigger construction companies have to take it, because if Dubai bounces back they want to pick up more work. Smaller companies have to take any money they can," one local analyst said.