Although the situation at hand is serious, and grand in the scale of sovereign debt, it hits us at a time where markets are sleeping. The American’s are thanksgiving, the whole of the Arab world is off for Eid, so any ripple or hiccup in a low trading period becomes exacerbated. But why has this sent shockwaves across international markets when hundreds of billions of dollars have been written off during the first phase of the downturn? Well, whether this is $60bn or more, it hits hard, especially when this is considered sovereign debt.
But while there has been talk of refinancing of debt in recent months, this actually came as much of a surprise to the market. This is why headlines over the world over the last few days have centred on Dubai. And why did markets freefall on first hearing of Dubai’s struggle? Well, the investment that Western banks had in Dubai World was significant. HSBC and Standard Chartered are said to be exposed by $25bn. That, and the fact that the dollar is at risk. Could the dollar collapse?
Indeed, Islamic Finance, itself, is being scrutinised and if Nakheel doesn’t repay on its $4bn sukuk, the options for Dubai World start to diminish. Whether or not Dubai World defaults, Dubai is now in the limelight. The critics had previously tried to trash Dubai’s reputation in many other ways. But this is the nail in the coffin. To the layman on the street, Dubai had taken out lots of debt, built some crazy buildings using slave labour, and now can’t repay the debt. It’s a little more complicated than that, but Dubai will find it difficult raising the type of money it once found easy to turn away. That’s a new era for Dubai.
What is important to note, is that strictly Dubai World hasn’t yet defaulted – it has just asked for a delay in the repayment of their $60bn. And while that might not happen, Abu Dhabi, the elder and oil rich emirate will step in to prevent a wholescale collapse that would take much of the Arab reputation back into the sinking sand. Abu Dhabi will want to balance saving Dubai versus maintaining itself as a viable investment hub – the balance between seeming overly eager and scrapping at fire sale assets – which it had always wanted, is how the cynics will paint it.
This is the second phase of the global recession. This is the second dip in the double dip scenario - markets have rebounded far too quickly. The first phase was defined by the bad debt in Western markets – and headline was Lehman. This second phase will headlined as Dubai’s collapse, even though it wasn’t the heart of the problem. A problem, yes, a scapegoat, yes. But the real story is that the problem of global debt is very much alive and Dubai has been part of that problem.