Dubai's debt problems shook European banking shares today despite the emirate's efforts to minimise the impact of a debt restructuring plan at two of its biggest companies that raised fears of default.
Banks shares, which had recovered over the last six months on hopes the worst of a global economic crisis was over, fell to lows not seen since May on fears of exposure to Dubai.
There were sharp losses in Europe, where the pan-European FTSEurofirst 300 index fell more than 2 per cent.
In Dublin the Iseq index of leading shares was down 45.73 points at 2827.47 at 12.40pm.
Trading on the London Stock Exchange has been halted by technical difficulties. The FTSE 100 index level frozen at 5,264.97, down 99.84 points, or 1.9 per cent at 10.38am.
Dubai, whose extravagant building projects have been largely put on hold since the crisis, said on Wednesday it would ask creditors at flagship firms Dubai World and property developer Nakheel, to delay repayment on billions of dollars of debt.
Today it tried to revive some confidence, by saying its profitable DP World would not be involved in the restructuring.
Yesterday's announcement sent the cost of insuring Dubai's debt against default soaring and bond prices tumbling.
State-run Dubai World has $59 billion of liabilities, its subsidiary Nakheel said in August, a large proportion of Dubai's total debt of $80 billion.
Nakheel's Islamic bond prices extended losses today, falling 12 points to 72, their lowest level since February.
The debt, which was originally due to mature on December 14th, traded as high as 110 yesterday before the Dubai government said it would ask creditors for a standstill.
Dubai's credit defaults swaps are being quoted as high as 500-550 bps, some traders said, while the cost of insuring Qatari and Abu Dhabi debt has also surged since the news.
Analysts expect financial support from deep-pocketed Abu Dhabi, a neighbouring member of the United Arab Emirates, to keep Dubai afloat. But Dubai will most probably have to abandon an economic model that focused on heavy real estate investment and inflows of foreign capital.
Dubai's economy was hit hard as the global credit crunch over the past year ended a six-year boom in the region and sent the emirate's once-flourishing property sector into decline.
Last weekend, the ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum, reshuffled the board of the Investment Corporation of Dubai, which manages his wealth, and changed the chief of the Dubai International Financial Center.
The reshuffle, which removed boom-era leaders from key positions, was widely seen as a shift towards more conservative stewardship of Dubai's resources.