Dubai: Dubai’s government said on Monday it was not responsible for the debts of its flagship conglomerate, offering little clarity on a plan to delay billions in debt repayments that has rattled world markets.

Dubai last week raised fears of a second bout of global financial turmoil by asking for a six-month repayment freeze on debt issued by Dubai World and its unit Nakheel, a property developer at the heart of the emirate’s boom.

In turmoil: A file photo of banners of Nakheel, a unit of Dubai World. Karim Sahib / AFP

Saleh told Dubai TV that banks did not need extra liquidity and that the market reaction to Dubai World’s restructuring had been overblown. The announcement was made on the eve of a holiday, sending global markets into a tailspin as investors awaited details of what it would mean for Dubai World’s $59 billion (Rs2.74 trillion today) in debts.

Asian stocks rebounded earlier on Monday from last week’s declines but markets in the seven-member United Arab Emirates (UAE) federation, which includes Dubai and Abu Dhabi, plummeted when they reopened after the four-day Eid al-Adha holiday.

Dubai’s market saw its biggest one-day decline since October 2008, and Abu Dhabi’s bourse saw its biggest ever fall. Saleh’s comments came after the markets had closed 7-8% down.

European shares fell more than 1% and US stock index futures pointed to a lower opening on Wall Street, which have been worried by the possible ramifications of a debt default for banks and property investors. “(This announcement) means that the banks are going to have an issue," said Vyas Jayabhanu, head of investments at Al Dhafra Financial. “We still expect some action by the federal government eventually, otherwise it will ruin the economic sector."

Dubai World had $59 billion of liabilities as of August, most of the $80 billion in total borrowing. Underpinning events since last week has been a debate on whether, when, or to what extent Abu Dhabi would continue to pick up the tab for a collapse in the emirate’s property-driven boom.

An Abu Dhabi government official said on Sunday the emirate would provide only selective support to Dubai firms —comments that fuelled speculation that Abu Dhabi, which has most of the UAE’s oil, will demand a political price for any Dubai bail-out.

Jebel Ali Free Zone, another Dubai World subsidiary, made a scheduled coupon payment on its 7.5 billion dirham ($2.04 billion) Islamic bond, a source said on Monday. The cost of insuring the debt of Dubai, Abu Dhabi and Dubai World against restructuring or default fell on Monday and debt prices stabilized from higher levels reached following the surprise announcement last week.

Abu Dhabi has strong incentives not to let Dubai collapse, said a note by Eurasia Group, but any support would come at a price.

“Longer term, Abu Dhabi will use this opportunity to establish greater influence over political and economic decision-making in Dubai, and Dubai will consequently adopt a more conservative financial model," the consultancy wrote.

Contagion for Abu Dhabi from the restructuring of Dubai World debt will be “unavoidable", ratings agency Moody’s said on Monday, and could lead to downgrades for UAE bank ratings.

Moody’s said the potential default of quasi-sovereign Dubai World “changes long-held market assumptions regarding implicit government support of local credits".

That was reflected in the stock markets with Abu Dhabi’s benchmark closing down 8.31%, compared with Dubai’s index, which ended 7.3% lower.