Neighbourly bailout gives debt-hit Dubai a lifeline

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The main index of shares, the DFM General Index, rose the most in 14 months having lost a fifth of its value since state-owned investment conglomerate Dubai World admitted it could not repay its debts.

Dubai World last month asked for a "standstill" on $26 billion of debt - just under half the $59 billion it owes - sending financial markets around the world into turmoil.

Neighbour Abu Dhabi this morning put up $10 billion to bail it out. The emergency funds will cover a $4.1 billion Islamic bond Dubai World property unit Nakheel was due to pay today. Nakheel is the developer behind The Palm and The World developments off the Dubai coast and racked up huge debts during a five-year property boom in the emirate.

Stock markets across Asia recovered early losses on the news of the bailout. Banking stocks in London, including HSBC and Standard Chartered, also rose on hopes that Dubai will be able to repay its debts.

"The Dubai news is a big surprise to the market," said Dariusz Kowalczyk, chief investment strategist for SJS Markets in Hong Kong. "We were preparing for a lack of payment today and now they're saying they will pay. This is definitely positive for investor confidence."

The rest of the $10 billion bailout money will be used to cover Dubai World's business needs until the end of April and bills owed to creditors and contractors.

The intervention from Abu Dhabi allayed fears - at least for now - that Dubai World would not be able to repay its debts and helped shore up the emirate's credit rating.

However, Dubai World could still collapse if it cannot negotiate an agreement with its creditors on the rest of its debts. The firm said: "Dubai World will continue to work with financial creditors to negotiate a standstill in an orderly way. As long as a standstill is successfully negotiated, Dubai World has assurances that the government of Dubai will provide financial support to cover working capital and interest expenses to ensure the continuity of key projects."

Jason Watts, head of credit trading at National Australia Bank in Sydney, said: "It comes as a relief for the market. Whilst we are not out of the woods yet, it is definitely a step in right direction."