DUBAI, United Arab Emirates — Just a year after the global downturn derailed Dubai's explosive growth, the city is now so swamped in debt that it is asking for a six-month reprieve on paying its bills — causing a drop in world markets Thursday and raising questions about Dubai's reputation as a magnet for international investment.
The fallout came swiftly after Wednesday's statement that Dubai's main development engine, Dubai World, would ask creditors for a "standstill" on paying back its $60 billion debt until at least May. The company's real estate arm, Nakheel — whose projects include the palm-shaped island in the Persian Gulf — shoulders the bulk of money due to banks, investment houses and outside development contractors.
In total, the state-backed networks nicknamed Dubai Inc. are $80 billion in the red, and the emirate needed a bailout earlier this year from its oil-rich neighbor Abu Dhabi, the capital of the United Arab Emirates.
With U.S. markets closed Thursday for Thanksgiving, other markets worldwide took the news badly — with the Dubai woes and the continued fall of the U.S. dollar giving investors twin worries.
In Europe, the FTSE 100, Germany's DAX and the CAC-40 in France opened sharply lower. Earlier in Asia, the Shanghai index sank 119.19 points, or 3.6 percent, in the biggest one-day fall since Aug. 31. Hong Kong's Hang Seng shed 1.8 percent to 22,210.41.
"Dubai's standstill announcement … was vague, and it remains difficult to discern whether the call for a standstill will be voluntary," said a statement from the Eurasia Group, a Washington research group that assesses political and financial risk for foreign investors interested in Dubai.
"If it is not, Dubai World will be going into default, and that will have more serious negative repercussions for Dubai's sovereign debt, Dubai World and market confidence in the UAE in general," the statement added.
Dubai became the gulf's biggest credit crunch victim a year ago. But its ruler, Sheik Mohammed bin Rashid Al-Maktoum, had continually dismissed concerns over the city-state's liquidity and claims it overreached during the good times.
When asked about the debt, he confidently assured reporters in a rare meeting two months ago that "we are all right" and "we are not worried," leaving details of a recovery plan — if such a plan exists — to everyone's guess.
After months of denial that the economic downturn even touched the glitzy city-state, the Dubai government earlier this year showed signs of trying to deal with the financial fallout that has halted dozens of projects and touched off an exodus of expatriate workers.
Last week, Sheik Mohammed demoted several prominent members of Dubai's corporate elite and replaced them with members of the ruling family, including his two sons, one of whom is Mohammed's designated heir.
"By shifting the power base back to the family, things are as they should be as far as Abu Dhabi is concerned," said Mohammed Shakeel, a Dubai-based analyst for the Economist Intelligence Unit.
After an expensive adventure in doing things the Western way, it's "going back to basics" for Dubai, Shakeel added.