End of the Boom? Dubai's Debt Woes Unsettle Financial World

Global investors with money in Dubai are suddenly feeling very nervous, now that it has become clear that the emirate's state-run holding company Dubai World is unable to repay billions in debt. There is even talk of a possible national bankruptcy, which could trigger a new financial crisis.

REUTERS

By Beat Balzli, and


In the Middle East, the days leading up to Eid al-Adha, or the Feast of Sacrifice, are not unlike the last few days before Christmas in the West. The devout are filled with religious thoughts, while others look forward to going on vacation.

In Dubai, schools, businesses and government offices closed last Wednesday for a break of over a week. Foreigners living in the emirate boarded flights for India, Europe or the Seychelles, while local inhabitants who were not on a pilgrimage to Mecca followed the customs of their ancestors and, taking advantage of the pleasant weather, drove into the desert to celebrate. A holiday calm would have descended on the Gulf emirate -- if only the government-owned holding company Dubai World hadn't decided to make one small announcement before the holiday.

"Dubai World," the company announced, "intends to ask all providers of financing to Dubai World and Nakheel to 'standstill' and extend maturities until at least May 30, 2010."

It sounded innocuous enough, like a polite request to the international financial markets to wait patiently for the repayment of a $3.5-billion (€2.3-billion) loan to the state-owned real estate subsidiary Nakheel. But to bankers, the announcement sounded more like a cry for help -- and one that took many investors completely by surprise.

'Shut Up!'

Just a few weeks ago, at the beginning of November, the emirate's ruler, Sheik Mohammed bin Rashid Al Maktoum, insisted at an investor conference that Dubai and its government-run businesses were in good shape. Those who were claiming otherwise should "shut up," he said in an unusually blunt outburst.

And now the emirate is unable to come up with a sum which was, at least by Dubai's standards, not that large. What is happening in Dubai is "unbelievable," says Eckart Woertz, chief economist at the Gulf Research Center.

The request to delay debt payments shocked the entire Arabian Peninsula and triggered deep concern throughout the global financial world. Stock prices on Asian and European exchanges plunged, with the German DAX losing 3.3 percent last Thursday. The Dubai stock market fell by more than 7 percent on Monday, the first day of trading since the Eid al-Adha holiday, while Abu Dhabi markets slid more than 8 percent.

Worried Investors

The problems in the Gulf are also worrisome to the German business community, because Arab sovereign wealth funds have invested in a few major German corporations, including Daimler, Deutsche Bank and Volkswagen. The Germans fear that Arab investors could pull out the money they have invested in Germany to raise funds for their cash-strapped neighbor.

International investors are worried about their investments in Dubai as their doubts about the emirate's financial solvency grow. Dubai World and its real estate subsidiary owe close to $60 billion at home and abroad. Many fear that, should the government-owned holding company go bankrupt, the effects could spread beyond Dubai's borders and affect other Arab states, even extending deep into Western economies, where they could cause serious damage.

Banks, in particular, would be hard-hit if Dubai World defaults on its debt. The company's roughly 70 creditors include major British and Arab lenders like HSBC, Barclays and Abu Dhabi Commercial Bank. German commercial property lender Hypo Real Estate, which has now been nationalized, invested a sum in the double-digit millions in the Dubai company. And according to statistics compiled by the German central bank, the Bundesbank, financial institutions in Germany have invested a total of €3.7 billion ($5.5 billion) in the United Arab Emirates.

Back with a Vengeance

The global financial crisis, which many thought had been overcome, has returned with a vengeance. Worried investors are asking themselves whether Dubai will remain an isolated case or if other countries are also at risk of being overwhelmed by the growing debt burden. The unpalatable term "national bankruptcy" is suddenly being bandied about again. Is the worst truly over, or is it yet to come?

Another illusion has burst along with the Dubai bubble, namely the idea that an Arab leader can conjure up an economic boom more or less out of thin air. Suddenly Dubai, the land of the future, is starting to look somewhat dated, after having gone through a decade of high-speed development, from its beginnings as a sedate port town on Dubai Creek to a center of global finance and trade.

Sheikh Mohammed built a glittering fairytale world, complete with flashy seven-star hotels, marble-tiled shopping centers and miles of skyscrapers jutting into Dubai's perpetually blue skies, skyscrapers that got ever bigger and ever more luxurious and expensive. It was also an increasingly decadent place; despite daytime temperatures of 44 degrees Celsius (111 degrees Fahrenheit), developers built an indoor ski slope with a 400-meter (1312-foot) run on artificial snow in an enormous building.

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