The party is over in Dubai. It officially ended for the freewheeling emirate late Wednesday afternoon when Dubai World, the government-controlled investment conglomerate, announced a six-month "standstill" on debt repayments.
If Dubai World was hoping that by timing the announcement on the eve of a 10-day religious and national holiday nobody would notice, it miscalculated.
Reaction in financial markets around the world was swift and devastating. In London, the FTSE 100 (partially owned by Dubai World) plunged by 3 percent and British banks saw a total of $23 billion in value wiped from their books. There were similar declines in Frankfurt, Paris and Milan.
Wall Street was saved by the Thanksgiving holiday, but the Dow dropped 230 points when the market opened Friday. It recovered but by the time the market closed at 1 p.m. all the major U.S. indexes ended Friday's holiday-shortened session more than 1 percent lower. Asian markets also took a hit on Friday.
The so-called “stand-still” declared by Dubai World is bit like telling the bank that you won't be paying the mortgage for the next six months. Your bank would not react sympathetically to such news, but in the case of Dubai World, where the mortgage is $59 billion, the banks have little choice but to sit back, swallow hard and hope somebody comes to Dubai's rescue.
For months, it was assumed that the somebody would be Dubai's wealthier, financially prudent sister emirate, Abu Dhabi. The oil-rich United Arab Emirates is a loose federation of seven emirates, and investors figured that Abu Dhabi would not allow Dubai's potential default to tarnish the U.A.E.'s overall reputation as a safe haven for investment. But thus far, Abu Dhabi has given no signal that it will come to the rescue.
Unlike Abu Dhabi and the other emirates, Dubai has little in the way of oil and gas resources. Its explosive growth over the last decade or so was fueled by high-end real estate speculation and a bid to market itself as a regional transportation hub and home to corporate clients.
Dubai World, which essentially functions as the Dubai government's investment arm, has a diverse portfolio that includes the famous Turnberry golf course in Scotland, Barneys clothing store, the QE2 cruise ship and a 20 percent stake in Cirque du Soleil.
The conglomerate is not the most transparent of operations, but its key holdings are Nakeel, its local property development subsidiary, and DP World, which runs the Jebel Ali container port in Dubai and several others around the world. DP World was about to take over several American ports in 2006 until security concerns raised by Congress scuttled the deal.
Nakeel is the creator of the emirate's signature Palm Islands: manmade islands in the shape of palm trees that are home to exclusive villas, shopping malls and hotels.
But as anyone who has driven along the Sheikh Zayed Road over the last 12 months can plainly see, the property bubble has burst. The 12-lane highway that slices through Dubai is lined with scores of finished or nearly finished glass and steel office towers and apartment buildings — most of them empty, most of them with huge “for rent” signs flapping in the breeze.
“Build it and they will come,” was Dubai's mantra. And for the better part of a decade, they did come — from Britain, India and Russia. But now they are going, casualties of a global recession.
The stunning reaction to the bad news from Dubai is an indication that global financial markets do not believe the economic crisis is over and that they see the potential crash of Dubai World as a possible harbinger of a double-dip recession.
On Thursday, the Dubai government tried to calm the panic with a statement issued by Sheikh Ahmed bin Saeed Al Maktoum, the chairman of Dubai's Supreme Fiscal Committee, who said the decision to defer debt payments for six months was "carefully planned" and executed with “full knowledge” of how the markets would react.
“While the government understands the concerns of the market and the creditors, it had to intervene because of the need to take decisive action to address its particular debt burden,” he said.
Local media downplayed the crisis. In the U.A.E., reporters have been warned that stories deemed harmful to the nation's economic well-being can earn a jail sentence.
But in London and elsewhere, the story was front page news. “Dubai in deep water,” was the banner headline of the Times of London. “Is Dubai going bust?” asked The Independent.
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