ESTORIL, Portugal: Dubai World's debt problems are a wake-up call that the economic recovery is still fragile and that there are still risks, OECD Secretary-General Angel Gurria told Reuters.

Gurria said the incident had reminded markets of growing debt concerns, something that should prompt governments to be cautious in withdrawing from large stimulus measures to boost growth after the worst global recession in decades.

Dubai spooked financial markets last week when it said two flagship firms, Dubai World and its Nakheel unit, planned to delay repaying billions of dollars in debts.

Dubai World "is a reminder of the fragility of the recovery process and that fact that it is still in its infancy and that there are still downside risks", Gurria told Reuters during a summit of Ibero-American leaders in Portugal. "It's a property development gone bad, but a big one."

He said governments should "keep their guard up", and err on the side of caution when deciding to cut stimulus packages.

"It's better to stay a little longer than to withdraw too early," Gurria said. "There is now also this parallel concern that debt is accumulating at a very fast speed and that obviously is a problem because markets are also getting very tense about that."

Dubai has alerted markets to those risks in recent days as have growing budget deficits in some countries, such as Greece which saw a widening of its bond spreads last week.

Gurria said the downturn was taking its toll on balance sheets.

"So you are having a lot of pressure on many balance sheets because of market related portfolios, that are not subprime, they weren't wrong in the beginning, but they are getting sour because of the economic situation in general," he said.

Gurria also warned of the growing risks of the so-called carry trade, whereby investors borrow funds in a currency with low interest rates or countries such as the United States to finance investments in countries with higher-yielding assets like China, driving prices higher.

"There is a danger of creating a bubble, because if you have a very large flow into a relatively stable number of assets you create inflation in the prices that is not consistent with the real change in value of the assets," he said.

He said assets such as Chinese stocks had risen much more than many other markets because of this process.

"You can create artificially high prices which can then with one piece of bad news or one movement in the exchange rate or interest rates suddenly burst, and that is when you have a disorderly adjustment," Gurria said.

Reuters

(China Daily 12/02/2009 page17)