By Liz Hazelton
Last updated at 4:57 PM on 27th November 2009

British banks were teetering on the brink of a fresh meltdown today after it emerged they had invested heavily in crisis-hit Dubai.

An $80billion debt default in the emirate has already reawakened the spectre of a global ‘double dip’ – that the first shoots of recovery could be wiped out by a second wave of recession.

But the level of exposure that the crippled British banking sector faces is now under renewed scrutiny.

The crisis was prompted by Dubai World, the development company behind three palm shaped islands as well as an off-shore replica of the globe , defaulting on its debt.

Today it emerged that:

* Royal Bank of Scotland (RBS) was Dubai World’s biggest loan arranger since January 2007, according to JP Morgan
* HSBC has an estimated £9.6billion in loans and advances to UAE customers
* Barclays has an exposure of around £3billion

Gordon Brown

Another bailout? Gordon Brown (right) meets Dubai’s ruler Mohammed bin Rashid Al Maktoum at Downing Street earlier this week

The figures are particularly alarming as the sector has had to be bailed-out by the tax payer on a number of occasions over the last year-and-a-half

Earlier this month, RBS and Lloyds Banking group received another £50billion to keep them afloat

RBS – which has received the biggest state rescue anywhere in the world – is now effectively owned by the taxpayer.

As the money markets continued to falter, Gordon Brown moved to dispel investors’ panic, claiming that he believed British banks were ‘well-capitalised’.

Speaking at the Commonwealth summit in Trinidad, Mr Brown said: ‘I think we will find this is not on the scale of the previous problems we have dealt with.’

Asked if the Dubai situation could spark a ‘double-dip’ recession, he said: ‘You are obviously going to have setbacks with a bank here or an organisation there which has had problems, but I do believe the world has a better way of monitoring what is happening, so we can be sure that – despite setbacks – we will continue to go forward.’

Under construction: While the world’s tallest tower the Burj Dubai nears completion, many ambitious building projects have come to a standstill

Abandoned: A filthy car left behind at Dubai airport after its owner became one of many ex-pats who fleeing the country after the bubble burst

Stock markets around the world have endured another turbulent 24 hours.

Wall Street plummeted 2 per cent when it opened at 2.30pm GMT this afternoon.

In London, the FTSE fell around 1.5 per cent first thing after a 3 per cent fall yesterday wiped almost £44 billion from blue-chip stocks.

The index recovered its poise to stand 0.5 per cent lower after the first hour of trading. It was at 5188.73 at 12.45pm, down from 5194.13 at start of trading this morning.

In Frankfurt, the Dax index fell 1.32 per cent to 5,540.34 while in France, the CAC lost 1 per cent to 3,639.66.

Asian markets were also under pressure overnight as Hong Kong’s Hang Seng fell more than 5 per cent and Japan’s Nikkei was 3 per cent lower.

Banks worldwide saw £14billion wiped off their market value yesterday.

Dubai’s rulers have done their best to calm fears, claiming the situation was under control.

Sheikh Ahmed bin Saeed al Maktoum, the uncle of Dubai’s ruler Sheikh Mohammed bin Rashid al Maktoum, said: ”Our intervention in Dubai World was carefully planned and reflects its specific financial position.

‘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.

‘However, we have had to intervene because of the need to take decisive action to address its particular debt burden.’

There were reports today that the emirate may consider selling the QE2, bought for $100million in 2007, to tackle some of its debt.

Much of the debt default falls on Dubai World, which owns property developer Nakhell.

As of August, the conglomerate had $59billion of liabilities which it now hopes to avoid redeeming for six months.

Analysts had expected that the Dubai’s oil-rich neighbour Abu Dhabi would offer financial support.

But Dubai may have to abandon an economic model that focused on developing swathes of desert with foreign money and labour.

Even the prospect of an Abu-Dhabi-backed bailout did little to allay concerns among investors, already worried the global economy may not be recovering quickly enough to justify a near doubling of prices for emerging market stocks and many commodities since March.

Tokyo traders have already dubbed the development Financial Crisis Part II.

‘The panic button’s been hit again,’ said Francis Lun, general manager of Fulbright Securities in Hong Kong.

‘The biggest worry I have is whether this will trigger a repricing in the overall emerging market,’ said Arthur Lau, a fund manager in Hong Kong with JF Asset Management.

‘This an important reminder that the credit crisis is forgotten but not gone,’ Robert Rennie, strategist at Westpac Global Markets Group, said in a note.

Asian banks, like their European peers, scrambled to distance themselves from Dubai, a desert emirate that emerged from dusty obscurity to invest in global lenders such as Standard Chartered and lure fund managers with the promise of a tax-free lifestyle.

Bursting the bubble: The launch of Atlantis hotel (above), on one of the palm islands (below) last November was an extravagant celebration of Dubai’s ambitions


The nerves showed in credit markets, at the centre of the financial storm triggered by the Lehman Brothers’ bankruptcy last year.

Asian credit default swaps, used to insure against default, were at their widest in a month, with the Asia ex-Japan iTraxx investment-grade index touching 124/129 basis points.

Dubai’s credit default swaps were being quoted as high as 500-550 basis points, some traders said on Thursday.

Dubai’s debt problems are a hangover from a property bubble that imploded after the financial crisis derailed its plans to become a magnet for tourists and a regional hub for everything from shipping to entertainment.

Banks’ exposure to a Dubai default pales in comparison to the $2.8 trillion in writedowns the International Monetary Fund estimates U.S. and European lenders will have to make between 2007 and 2010 as a result of the credit crisis.

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