Written by:
Ryan Shyu

More on Dubai

My article in the latest BT magazine detailed the housing bubble in Dubai and the resulting financial crisis. Well, it turns out the situation in Dubai has suddenly gotten much, much worse.

The central problem was that no one really knew how deep in debt Dubai’s effectively state-owned conglomerate of companies, Dubai Inc., really was. Investors had assumed that debt levels were in the $80-90 billion range, but had hoped that the recent bailout from Abu Dhabi had righted the ship.

The bombshell dropped on the Wednesday before Thanksgiving. Dubai World, one of Dubai Inc.’s major holding companies, asked for a six-month moratorium on some $60 million in debt payments. This betrays extreme financial weakness, and the markets are panicking.

UBS AG analysts are now saying that Dubai’s debts could be much greater than the previously estimated amount. Pressure is building on Abu Dhabi, the home of the Arab Monetary Fund, to give Dubai a second bailout.

No one really knows the extent of Dubai’s woes. But based on recent developments, it is clear that their issues are less problems of liquidity than of solvency. If their debt is in fact far in excess of previous estimates, the government itself may be forced to declare bankruptcy; given Dubai’s recent emergence as a significant financial center, this could have very unpleasant consequences for developing nations who rely on Dubai for investment and for the world as a whole, which is still trying to recover from the crisis of 2008.

Photo courtesy of Flickr.