NEW YORK — A debt crisis in Dubai rattled world financial markets Friday, raising concerns that some banks could further tighten lending and stall the global economic recovery.
The possible spillover effects centered on fears that international banks could suffer big losses if Dubai’s investment arm defaulted on its $60 billion debt. Stock and commodity markets tumbled in New York, London and Asia as investors flocked to the U.S. dollar as a safe haven.
But earlier worries that the crisis might trigger another financial meltdown seemed to ease after some analysts downplayed the risks for U.S. banks, which are thought to have little exposure to the Middle Eastern city-state that is part of the United Arab Emirates.
U.S. stocks fell sharply but rebounded from their lows as investors concluded that the damage might be contained.
The Dow Jones industrial average lost about 155 points, or roughly 1.5 percent, in a shortened trading day, and other stock averages also sank.
“I don’t think the collateral damage is going to be that great,” said Jeffrey Saut, chief investment strategist at Raymond James. “People will dig into this over the weekend, but I think balance sheets have healed enough to withstand a shock like this.”
Still, the crisis in Dubai pointed to the vulnerability of the global economy, despite signs of recovery. Last year’s credit debacle left major banks with billions in losses, forcing them to reduce lending to consumers and businesses.
Access to credit has improved in recent months, but analysts said Dubai’s woes could make some banks more cautious. That could further squeeze lending and weaken the recovery after the deepest recession in decades.
“What we need for the economic momentum to continue is for banks to feel confident about lending, and clearly, what has happened in the last 48 hours is not a step in the right direction,” said David Williams, banking analyst at Fox-Pitt Kelton in London.
European banks appeared to be at most risk if Dubai’s main investment arm, Dubai World, can’t pay its bills. London-based lenders HSBC Holdings and Standard Chartered could face losses of $611 million and $177 million, respectively, according to early estimates from analysts at Goldman Sachs. Both have substantial Middle East operations.
Troubles in Dubai
• Big spending: In recent years, Dubai has expanded with ambitious, eye-catching projects such as its palm-shaped islands and the world’s tallest skyscraper in hopes of becoming tourist- friendly. In the process, the state-backed networks nicknamed Dubai Inc. have racked up $80 billion in red ink.
• Debt default: Dubai’s main investment arm, Dubai World, revealed this week that it was seeking at least a six-month delay on repaying its $60 billion debt. Credit agencies responded by slashing debt ratings on Dubai’s state companies.
