Banks play down Dubai exposure

Stocks from Tokyo to London were haunted by concerns that banks were exposed to state companies in Dubai, whose rise from a desert backwater into the business hub of the world's top oil exporting area had lured expatriate money and executives.

The crisis began on Wednesday when Dubai, part of the United Arab Emirates federation, asked to delay payment on billions of dollars of debt issued by conglomerate Dubai World and its main property subsidiary Nakheel, developer of three palm shaped islands that once lured celebrities and the super-rich.

"We have seen a classic risk aversion reaction in the markets over the past 24 hours. The dollar has slumped, the yen is stronger," a Societe Generale note said.

"Anybody who thought the exit profile for markets from the great recession and the great financial crisis was going to be a smooth one was kidding themselves."

Dubai World had $59 billion (36 billion pounds) of liabilities as of August, most of Dubai's total debt of $80 billion.

The numbers pales in comparison to the $2.8 trillion in writedowns the International Monetary Fund estimates U.S. and European lenders will have made between 2007 and 2010 as a result of the global credit crisis.

"The events in Dubai in recent days are one of the hiccups if you like, one of the difficulties, which affirms that we were right to highlight the uncertainty ahead of us and that the road ahead could be a bumpy one," European Central Bank Governing Council member Athanasios Orphanides said.

International banks' liabilities related to Dubai World could be as high as $12 billion in syndicated and bilateral loans, banking sources told Thomson Reuters LPC.

French banks said their exposure to the Dubai crisis was limited and Italy's central bank said Italian banks should face no problems linked to the Gulf trade and tourism hub. Those sentiments were echoed by Chinese banks.