Gulf markets dropped again on Tuesday, taking little comfort from Dubai World's plan to restructure about $26 billion (15.7 billion pounds) of debt, while the rulers of Abu Dhabi and Dubai talked up their economic strength.
Dubai stocks fell a further 3.6 percent and the Abu Dhabi bourse lost 5.6 percent on their second trading day since Dubai last week asked creditors of Dubai World and its property arm Nakheel for a six-month delay on debt repayments. Qatar's bourse was also more than 8 percent lower.
State-controlled Dubai World, which led the emirate's transformation into a regional hub for finance, investment and tourism, unveiled details late on Monday of its plan covering $26 billion of debt owed by its main property firms, Nakheel and Limitless.
Global markets took a pounding when the Dubai news broke last week, though on Tuesday Asian and European stocks were up, following the lead from Wall Street overnight.
Dubai's ruler Sheikh Mohammed bin Rashid al-Maktoum, who is also the United Arab Emirates' vice president, prime minister and defence minister, said the global reaction had shown "a lack of understanding."
"We are strong and persistent," he told reporters.
Sheikh Khalifa bin Zayed al-Nahayan, president of the UAE and ruler of Abu Dhabi, said the UAE economy was showing signs of growth in the fourth quarter.
Dubai's troubles could shift political power in the UAE, a seven-emirate federation celebrating 38 years of independence on Wednesday, towards oil-producing Abu Dhabi and away from its exuberant neighbour.
The Dubai World group, whose total liabilities are estimated at nearly $60 billion, said the restructuring would exclude "financially stable" units such as Infinity World Holding, Istithmar World and Ports & Free Zone World, which includes DP World, Economic Zones World, P&O Ferries and Jebel Ali Free Zone.
Dubai World would look at options for cutting its debt, including asset sales, it added.
In London, ratings agency Moody's said it estimated the Dubai government and its related entities carried $100 billion of debt, above the market estimate of around $80 billion.
Moody's also said ports operator DP World and Jebel Ali Free Zone had approximately $10 billion in debt.
"Dubai's corporate landscape is now effectively a high-yield market," said Philip Lotter, senior vice president of EMEA corporate finance group at the ratings agency.
Mardig Haladjian, general manager of Moody's EMEA banking group, said possible multiple defaults related to Dubai World's restructuring could hit the credit ratings of UAE banks, but not those of international banks exposed to the group.
In a sign that concern among local banks was subsiding, however, UAE interbank offered rates eased, with the 3-month rate falling to 1.90500 percent from Monday's 1.94125 percent fix.
And the cost of insuring Dubai debt against restructuring or default fell, with its five-year credit default swaps dropping to 526 basis points from Monday's close of 570, according to CMA Datavision. It stood around 300 basis points before last week.
Jebel Ali Free Zone, a unit of Dubai World which is not part of the restructuring, said it had made a coupon payment on Monday on its 7.5 billion dirham ($2 billion) Islamic bond.
Dubai World's restructuring plan appeared to calm global fears of contagion and reassured some investors in the region.
"This is definitely good news, it shows they are still committed to their payments, and it removes all fears that this is a complete default," said Hassaim Arabi, chief executive at Gulfmena Alternative Investments.
A Dubai-based strategist said the plan was a positive step because it disclosed the scale of the problem. "But the main concern remains unchanged. What is the outcome of those negotiations with regard to the Nakheel problem?" he asked.
The Abu Dhabi market had plunged 8.3 percent on Monday, its worst one-day drop on record, while Dubai's fell 7.3 percent, its biggest in more than a year.