Dubai has insisted it took into account the effect its bid to delay paying creditors would have on world markets.
But it offered no specifics and did little to ease worries that hit trading for a second day.
Sheik Ahmed bin Saeed Al Maktoum, the chairman of Dubai's Supreme Fiscal Committee, stressed that the call to defer for at least six months at least some of $60 billion owed to creditors by Dubai World, the emirate's chief investment arm, was “carefully planned” and aimed at taking decisive action.
But the announcement appeared to reinforce worries that Dubai's rulers are fuelling a crisis of confidence from world markets with their policies of keeping tight control over information on their fiscal standing and deal making. The timing of the announcement worsened the concerns, since it came ahead of a three-day Islamic holiday.
Some analysts believe the Dubai debt mess could bring demands for more financial transparency from Dubai and across the Gulf, which has become a magnet for international investment in the past decade.
“It touched investors' sensitive nerves,” said Cai Junyi, an analyst for Shanghai Securities. “The world is watching whether that will have any substantial impact ... Dubai World is just like a small window that might reflect another financial tsunami.”
World markets reacted in shock to what some analysts indicated amounted to a default by Dubai World, the city-state's key engine of growth with interests around the world ranging from ports to real estate.
Oil prices dropped and Asian stocks slumped for a second day but European stock markets appeared to be stabilising after a heavy sell-off yesterday that saw bank shares take a pounding over possible exposure to Dubai debt.
Ahmed's statement came a day after the Dubai government announced a restructuring of Dubai World and said it would ask creditors to delay debt repayment until at least May.
The sharp reaction in equity markets worldwide apparently forced the taciturn rulers of Dubai to come forward with a bit more information.
“Our intervention in Dubai World was carefully planned,” Ahmed said in the statement. “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,” Ahmed also said.
Ahmed called the Dubai World's debt freeze request a “sensible business decision” and said Dubai's leadership had to intervene when it did “because of the need to take decisive action to address its particular debt burden”.
He insisted that claims Dubai over-reached during the good times were unjustified, saying unprecedented growth over the past decade “helped lay the foundation for what is now a broad-based, sustainable economy”.
A year after the global downturn derailed Dubai's explosive growth, the semi-autonomous city-state known for its man-made islands, the world's tallest tower and indoor ski slope, has been grappling with its debt load, issuing bonds that have been bought up by both the United Arab Emirates' central bank and, most recently, two banks majority owned by neighbouring Abu Dhabi.