International   

Why the Dubai crisis matters

PHOTO: AFP

LANDMARK: Burj Dubai, the world's tallest manmade structure nearing completion in Dubai in April. The 160-storey skyscraper, under construction since 2004, is estimated to cost $1 billion.

Dubai has huge debts. The state has borrowed $80 billion to finance construction designed to reinvent it as a centre for finance and tourism. Dubai World, the state’s main holding company, which owns assets ranging from the Palm Island to Barneys department store in New York, a stake in Las Vegas casino company MGM Mirage and ports around the world, owes some $59 billion.

The fear is the loans will not be repaid in full. Dubai World’s creditors include some of the banks which escaped most lightly from last year’s meltdown, such as HSBC and Standard Chartered as well as the U.K. state-backed RBS and Lloyds Banking Group.

If Dubai defaults on its debts it would be the largest sovereign default since Argentina in 2001. Dubai World has 70 creditors who could face write-downs on their debt.

Why have investors got so frightened?

The worry is that this could be the alarm bell that heralds a new round of financial chaos. History shows that crises often start in the most unexpected places. The south-east Asian financial crisis of 1997, which engulfed Indonesia and South Korea, started in Thailand. In 2001 it was Argentina and last year’s problems first bubbled to the surface in Iceland and Ireland.

“We are still in an environment where we are vulnerable to financial shocks of any sort and this is one of those,” said Russell Jones, head of fixed income and currency research at RBC Capital Markets. Just when the markets were starting to regain their confidence, Dubai threatens to destroy it.

The extent of investors’ concern about the news from the emirate pushed Britain’s leading stock market index down 3.2 per cent, the biggest daily fall in nearly nine months.

There are now fears that Dubai might be forced into a fire sale of assets, which would push asset values down further. Shares in the London Stock Exchange for instance, on Thursday lost 60pence to 754pence as the Dubai exchange owns a 20 per cent stake in its London rival.

Dubai has also been a big investor in commercial property around the world. The nascent recovery seen in London could be wiped out if cash is withdrawn.

Investor angst has been heightened because the announcement of a standstill on debt repayments was made just ahead of the four-day Id holiday, meaning many questions will go unanswered until next week.

Why has there been a property bubble there?

Dubai was the epitome of the cheap credit property boom, with developers using inexpensive loans to finance grandiose building projects. Its plan to become a centre of finance and tourism pulled in millionaires and second home buyers, who were enticed by the homes on offer and rapidly rising prices — which fuelled the boom further.

Why do so many celebrities live there?

The sun, the sea, the shopping. And very low tax rates for permanent residents. What other reasons do they need?

Dubai wooed many big names, including England soccer stars Michael Owen and David Beckham, supermodel Naomi Campbell and Denzel Washington, to acquire palatial villas on the Jumeirah Palm, which is seen as a status symbol. — © Guardian Newspapers Limited, 2009

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

Sri Lanka presidential poll on January 26
Dubai’s financial woes shake up world
Outrage in Pakistan at FICCI report
Why the Dubai crisis matters
Church, police “covered up child sex abuse”
Critics unimpressed by U.S. 17% emissions cut plan
Conference on Mahatma
Invasion of Iraq “of questionable legitimacy”, says U.K. envoy
‘Attacks on Indian students not racist’

Copyright © 2009, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu