How serious is the Dubai debts crisis?

Has Dubai gone bust? -- Technically, the crisis at Dubai World is a purely commercial matter, and should not count as a national or sovereign debt default. But the company is so intimately tied to the emirate and its ruling family that the government would have tried everything possible to protect it before resorting to this.

Why is Dubai still causing concern? Yesterday (30 Nov) was the first day investors were able to trade in many Middle East markets since news broke on Wednesday that Dubai World, one of the region’s largest property companies, was unable to pay its debts. Many suspect the news was released before the holiday, Eid, to limit the global reaction; instead investors panicked even more due to a lack of information. Their worst fears were confirmed yesterday when the Dubai government finally issued a statement but refused to stand behind the company.

What about western markets? European and U.S. stock markets have calmed down since last week, but the episode has reignited fears that the financial system is not through the worst. British banks such as HSBC, Standard Chartered, RBS and Lloyds are most exposed, although they have told U.K. regulators their losses are manageable. Other countries with large international debts such as Greece, Ukraine and the U.K. have seen investors take fright, sparking fresh fears that the next phase of the crisis will move from companies to countries.

Has Dubai gone bust? Technically, the crisis at Dubai World is a purely commercial matter, and should not count as a national or sovereign debt default. But the company is so intimately tied to the emirate and its ruling family that the government would have tried everything possible to protect it before resorting to this.

What help is Dubai getting from other Arab states? Abu Dhabi, Dubai’s larger neighbour, yesterday offered to provide emergency funding for local and foreign banks, but pointedly declined to provide specific guarantees to Dubai World. What support is offered is likely to come with strings attached.

Will the IMF need to get involved? Rumours swirled over the weekend that the International Monetary Fund was preparing an emergency bailout. This was downplayed in Washington, but officials called on local central banks to intervene and said they were monitoring the situation carefully.

Has the crisis been overblown? The recovery in international markets has led some market commentators to argue that the Dubai World default was an isolated incident. However, both western banks and local politicians have a strong incentive to underestimate the losses. Independent analysts who have studied Dubai’s debt problem such as UBS and EFG-Hermes, a local investment bank, estimate it is much larger than the official $80bn — possibly rising to $120bn-$150bn.

Will the problem spread? Jitters over the creditworthiness of countries such as Greece could become self-fulfilling if they are unable to finance their debts using international investors. This would put enormous pressure on the eurozone, which may be forced to bail out weaker members or see the future of the single currency put in jeopardy. Countries outside the euro, such as the U.K., may also see the cost of borrowing increase if the cost of insuring their debt continues to rise. But the more immediate worry is the exposure of British banks, which make up four of the six banks most heavily involved in Dubai World.

Copyright: Guardian News & Media 2009