The government of Dubai on Monday said it would not guarantee the debt of Dubai World as it sought clarify comments made last week by the state-owned entity that sent shockwaves through global markets.
In its first public comments since the crisis erupted over the liabilities of its public companies, Dubai's department of finance on Monday outlined its policy towards the outstanding loans which total $59bn.
Abdulrahman al-Saleh, director general of Dubai's department of finance, said in an interview with Dubai TV that creditors had to take responsibility for their own lending decisions and differentiate between advances to companies and the state. He also said global markets had overreacted to the news.
Mr Saleh admitted that creditors of Dubai World, which owns DP World, the ports operator, and Nakheel, the property investment company, would be affected in the short-term but claimed there would be long-term benefits as the government restructured the business.
The Dubai department of finance said last week it would request a standstill on all Dubai World's debts, including a $4bn sukuk or Islamic bond payable on December 14.
Global investors were confused by the standstill request as Dubai officials had said for the previous three months that the trading and financial hub would face no problems in paying off its debts.
The local Dubai Financial Market closed down 7.3 per cent on Monday, its biggest drop in a year, in its first trading session since the Eid al-Adha holiday. Other Gulf markets were closed because of the holiday.
But shares in DP World, one of Dubai's most valuable state assets, tumbled 15 per cent on the Nasdaq Dubai bourse.
Five-year credit default swaps for Dubai rose on Mr Saleh's comments, widening to 594.6 basis points according to CMA Datavision, after earlier tightening on UAE central bank intervention announced on Sunday.
Elsewhere, Dubai World has made the payment owed today on a Dh130m coupon on a sukuk issued by the Jebel Ali Free Zone Authority, the industrial park next to Dubai's largest port owned by Dubai World, bankers said.
But Nakheel, the company at the centre of Dubai's financial woes, on Monday asked for all three of its sharia-compliant bonds worth $5.25bn to be suspended from trade "until it is in a position to fully inform the market".
Sentiment was not helped by a note from EFG-Hermes, a local investment bank, which said that the estimates of Dubai's $80bn debt burden, consisting of bonds and syndicated loans, could rise to $120bn-$150bn, if bilateral loans and other missing information is included.
In Dubai the mood among traders returning to work after the religious holiday was sombre.
"We are very disappointed -- we had expected the market to drift down. Instead it fell down ... just like that," said Muhammed, a private investor, as he looked at a ticker covered in red.
"This is punishment day. Why didn't we sell last week? This is punishment for the unexpected news from Dubai World last week," he added.
The UAE markets limit trade on liquid stocks when they fall 10 per cent. Emaar, a major listed developer in Dubai and an important bellwether for the emirate, slumped 9.9 per cent as soon as the DFM opened.
The Abu Dhabi Stock Exchange, the third bourse in the United Arab Emirates, lost more than 8 per cent in heavy trading.
"It's a short-term panic sell-off," said Emad Mostaque, an emerging markets fund manager at Pictet in London. "There are 100m sell orders on all the higher traded shares."
The UAE markets close again on Wednesday and Thursday for the country's national day, before reopening on Sunday.
Egypt's bourse lost 7.9 per cent as international investors take a more negative view over regional risks.