massive banners advertising available space adorn the sides of nearly
every building. Hundreds of cranes that just last year were working
around the clock now stand idle all day. Unfinished sky scrapers
seem almost as common as completed ones. And workers who were recently
flooding in from around the globe are now beginning to leave.
of Dubai, one of seven sheikdoms that form the United Arab Emirates
(U.A.E.), has been badly damaged by the economic crisis. Property
prices have collapsed, losing half of their value. The low-interest
debt-fueled extravaganza in the desert fiefdom is screeching to
a halt, at least for now.
a massive state-owned conglomerate responsible for many of the emirate’s
audacious real estate projects, announced last week that it was
seeking a six-month freeze on about $60 billion in debt repayments.
The government-run company will be restructuring around half of
the debt so far, officials stated Monday. One of the firm’s
construction arms, Nakheel, asked the Dubai stock market to suspend
its $5 billion worth of Islamic bonds until it could “fully
inform the market.”
announcement of the debacle, commentators and some analysts became
worried that the crisis could set off a “tsunami” or even
a “domino effect” that would roil world markets again.
The announcement was compared to everything from Argentina’s
default in 2002 to Lehman Brothers’ collapse last year. Stock
markets around the world dropped sharply as investors tried to figure
out what it all meant.
rule out – as a tail-risk – a case where this would escalate
into a major sovereign default problem, which would then resonate
across global emerging markets in the same way that Argentina did
in the early 2000s or Russia in the late 1990s,” explained
analysts for Bank of America after the news broke. Other banks issued
similarly dramatic warnings, while even the Obama administration
announced that it was “monitoring” the situation.
With the potential
for a default on the debt, rating agencies including Moody’s
and Standard and Poor’s immediately stepped in and downgraded
several Dubai state entities. The debt restructuring "may be
considered a default under our default criteria, and represents
the failure of the Dubai government (not rated) to provide timely
financial support to a core government-related entity," said
S&P. The cost of insuring Dubai debt also soared, as did protection
for Abu Dhabi debt.
central bank, meanwhile, pledged to support national financial institutions
and local branches of foreign banks with increased “liquidity”
(fiat money). But finance officials in Dubai warned Monday that
the government was not responsible for the company’s debt.
"Creditors need to take part of the responsibility for their
decision to lend to the companies," declared the director general
of Dubai’s Department of Finance. "The company received financing
based on its project schedule, not a government guarantee."
It turns out
British banks, some owned by taxpayers, were particularly exposed,
with some estimates claiming they own as much as $50 billion worth
of Dubai debt. American banks were left relatively unscathed, though
Citibank does have some investments in the emirate. Speculation
abounded about whether the government would end up stepping in to
bail out its company, or whether Abu Dhabi, the richest emirate
in the U.A.E., would offer some assistance. But so far, Abu Dhabi
has only pledged to selectively support some of the debts –
not extremely reassuring to the market that had assumed an implicit
government guarantee existed because of the nature of the conglomerate.