Is the Double-Dip Depression Here?
Dubai threatens British and other banks all over the world

by Liz Hazelton

• Barclays, RBS and HSBC face losing billions
• Wall Street plummets by 2 per cent after late opening
• FTSE falls by 1.5 per cent before stabilising
• Banks see £14billion wiped off market value in one day
• Dubai may consider selling QE2 to tackle debt

British banks were teetering on the brink of a fresh meltdown today after it emerged they had invested heavily in crisis-hit Dubai.

An $80billion debt default in the emirate has already reawakened the spectre of a global 'double dip' – that the first shoots of recovery could be wiped out by a second wave of recession.

But the level of exposure that the crippled British banking sector faces is now under renewed scrutiny.

The crisis was prompted by Dubai World, the development company behind three palm shaped islands as well as an off-shore replica of the globe, defaulting on its debt.

Today it emerged that:

• Royal Bank of Scotland (RBS) was Dubai World's biggest loan arranger since January 2007, according to JP Morgan
• HSBC has an estimated £9.6billion in loans and advances to UAE customers
• Barclays has an exposure of around £3billion

The figures are particularly alarming as the sector has had to be bailed-out by the tax payer on a number of occasions over the last year-and-a-half

Earlier this month, RBS and Lloyds Banking group received another £50billion to keep them afloat

RBS – which has received the biggest state rescue anywhere in the world – is now effectively owned by the taxpayer.

As the money markets continued to falter, Gordon Brown moved to dispel investors' panic, claiming that he believed British banks were 'well-capitalised'.

Speaking at the Commonwealth summit in Trinidad, Mr Brown said: 'I think we will find this is not on the scale of the previous problems we have dealt with.'

Asked if the Dubai situation could spark a 'double-dip' recession, he said: 'You are obviously going to have setbacks with a bank here or an organisation there which has had problems, but I do believe the world has a better way of monitoring what is happening, so we can be sure that – despite setbacks – we will continue to go forward.'

Stock markets around the world have endured another turbulent 24 hours.

Wall Street plummeted 2 per cent when it opened at 2.30pm GMT this afternoon.

In London, the FTSE fell around 1.5 per cent first thing after a 3 per cent fall yesterday wiped almost £44 billion from blue-chip stocks.

The index recovered its poise to stand 0.5 per cent lower after the first hour of trading. It was at 5188.73 at 12.45pm, down from 5194.13 at start of trading this morning.

In Frankfurt, the Dax index fell 1.32 per cent to 5,540.34 while in France, the CAC lost 1 per cent to 3,639.66.

Asian markets were also under pressure overnight as Hong Kong's Hang Seng fell more than 5 per cent and Japan's Nikkei was 3 per cent lower.

Banks worldwide saw £14billion wiped off their market value yesterday.

Dubai's rulers have done their best to calm fears, claiming the situation was under control.

Sheikh Ahmed bin Saeed al Maktoum, the uncle of Dubai's ruler Sheikh Mohammed bin Rashid al Maktoum, said: ''Our intervention in Dubai World was carefully planned and reflects its specific financial position.

'The government is spearheading the restructuring of this commercial operation in the full knowledge of how the markets would react.

'We understand the concerns of the market and the creditors in particular.

'However, we have had to intervene because of the need to take decisive action to address its particular debt burden.'

There were reports today that the emirate may consider selling the QE2, bought for $100million in 2007, to tackle some of its debt.

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November 28, 2009

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