Gulf markets dropped again on Tuesday, taking little comfort from Dubai World's plan to restructure about $26 billion (15.6 billion pounds) of debt and despite reassurances on economic resilience from the rulers of Abu Dhabi and Dubai.
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 the restructuring and which parts of its empire were affected. The process will focus on $26 billion of debt owed by its main property firms, Nakheel and Limitless.
Dubai World said it had appointed Moelis & Co, the investment bank created by former UBS president Ken Moelis, to advise on the restructuring while Rothschild would continue to be its investment adviser.
Global markets took a pounding when news broke last week that Dubai World was unable to pay its debts, although on Tuesday, Asian and European stocks were up, following the lead from Wall Street overnight as fears of contagion eased.
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 have the determination and will power to face all challenges, including the ill-intentioned media challenges," Sheikh Mohammed said, according to a statement from his office.
John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole Group in Riyadh, said the Dubai ruler's remarks "although very broad, should be welcomed by global markets at a time when they are thirsty for clarity, reassurance and information."
Sheikh Khalifa bin Zayed al-Nahayan, president of the UAE and ruler of Abu Dhabi, said the UAE economy was showing signs of gradual growth in the fourth quarter.
Dubai's troubles could shift political power in the UAE, a seven-emirate federation celebrating 38 years of unity 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.
But the group may not be able to keep revenue-generating assets such as port operator DP World and Istithmar's 2.7 percent stake in Standard Chartered, while selling its battered property firms.
"I don't think they're in a position to choose," Khuram Maqsood, managing director of Emirates Capital and a former director at Istithmar.
"Dubai World desperately needs cash. Everything is for sale. I don't think anything is sacred in the current environment."
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 (1.2 billion pound) 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 disclosed the scale of the problem, but did not answer key concerns. "What is the outcome of those negotiations with regard to the Nakheel problem?" he asked.
The Abu Dhabi stock 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.