Dubai’s Debt Reckoning

A good material for learning English.

The credit problems of a unit of Dubai’s state-owned investment company have given financial markets a scare, but put us down as thinking the event is left-over business from the mid-decade mania more than it is a sign of immediate new economic troubles.

Like subprime mortgages and Citigroup’s off-balance sheet “structured investment vehicles,” Dubai’s debt binge was made possible by the Federal Reserve’s global subsidy for credit. As a Middle East outpost without oil wealth, the city-state used easy credit in an effort to build itself into the next Singapore. And it has made some impressive strides as a tolerant entrepot for traders and investors looking for an entry into the Arab world. Its openness to the world’s money and people is certainly a better model for Middle East development than is Saudi Arabia.

On the other hand, the city-state clearly got carried away during the boom, and its property market in particular became a bubble as overbought as condos on the Las Vegas strip.

In the wake of Wednesday’s request for a debt holiday, investors immediately put on their post-Lehman Brothers “contagion” hats and fled for safety. The otherwise sickly dollar rallied, while gold, oil and stock markets world-wide all fell. Nevermind that no one could say who except the creditors of Dubai World’s real estate subsidiary would be harmed by the request for an interest-payment moratorium. European banks have nearly $84 billion in exposure to all of the United Arab Emirates, of which Dubai is merely one, while U.S. banks seem less vulnerable.

Stocks in particular have had an historic rally since March, and the Dubai debt blowup may have been the excuse investors needed to pocket some of their winnings and protect against a correction.

One irony is that Dubai’s debt problem is likely to reinforce the determination of the world’s central bankers, especially those at the Fed, to keep the money spigots wide open to prevent any new credit crunch. In the near term, this will help gold and other riskier assets that are rising on the surge of greenbacks. In the longer run, it may feed new asset bubbles and lead to future credit problems once the Great Reflation inevitably stops. Thus could one bursting bubble end up feeding another.


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