Global markets are reeling from news that Dubai World, the investment arm of Dubai's government, is seeking to suspend payments
for its massive debt. Dubai, once seen as the Middle East playground
for the super-wealthy, appears unable to support its breakneck
construction and infrastructure projects. Bloomberg News reports
it could owe as much as $80 to $90 billion. Will financial markets on
Wall Street as well as Europe and Asia recover or will Dubai's descent
drag them down? How worried should we be about Dubai?
- Isolated Incident, The New York Times's Paul Krugman argues. "[Y]ou can see this as basically just another commercial real estate bust. Either you view Dubai World as nothing special, despite sovereign ownership, as Willem Buiter does; or you think of the emirate as a whole as, in effect, a highly leveraged CRE investor facing the same problems as many others in the same situation. Finally, you can see Dubai as sui generis. And really, there has been nothing else quite like it."
- Disaster Averted? Time's Justin Fox urges calm. "As of this morning, things are already calming down a bit. Some Asian markets were down sharply overnight, and U.S. stock markets started the day 2% down. But European markets, which took the brunt of the hit yesterday, are up on the day," he writes. "A return to the indiscriminate panic of last fall would be really bad. A move toward a more skeptical attitude toward risky assets, in which investors feel compelled to do more work to sort out the dodgy from the relatively safe, would be a really healthy development. So far I think we're getting the second reaction."
- How This Could Go Wrong TalkingPointsMemo's Josh Marshall explains. "In itself the numbers aren't that big (measured on a global scale), only tens of billions of dollars. But if larger institutions turn out to have a lot of exposure to it, and that pushes some of them back into unstable territory and rushed liquidations of assets, the whole thing could spread. At a minimum it's an example of the still quite risk averse international financial markets."
- Willful Blindness by Global Investors The Guardian's Simon Tisdall insists this was inevitable "Was anywhere heading for a fall so obviously as Dubai? Yet why did no one ever scream? Why did everyone just marvel? When I first visited the place three years ago, it was already the most dangerous speculative bubble on earth. Breakneck building – using reputedly a quarter of the world's cranes – was sustained on hysterical public relations and $80bn of debt. By last March the signs of impending doom were everywhere. [...] Yet anyone who wrote a word of the impending doom was excoriated," he writes. "But before the desert sands close over it, Dubai's lesson should be learned. It is the oldest in the book. Like the credit crunch in the west, the short route to folly is the belief that what goes up need never come down and there is no such thing as bad money."
- Further Decline of Dollar Reuters's Felix Salmon registers surprise that the news sent the Dollar down and Japanese Yen up. "When the markets are really scared, they tend to flee to the safety of the dollar, rather than to the Japanese yen," he writes. "[I]t's clearly not good news that a severe-if-not-life-threatening shock such as this one sends the dollar down rather than up. The immense fiscal cost of the financial crisis has hurt the dollar’s standing as the global reserve currency, and if I were at Treasury right now I’d be very concerned about this reaction."
- Uncertainty Ahead The New Republic's Noam Scheiber gives some history. "You have to remember that the Great Depression only became “great,” that is, global, when an obscure Austrian bank went under in 1931, and set off a massive financial explosion around Europe. Capitalism is an irrational system that is often full of unpleasant surprises. The collapse of Dubai World may turn out to be nothing. But it could also turn out be one of those unpleasant surprises."
- Good Riddance, Dubai The U.K. Independent's Johann Hari fumes at Dubai's "slavery" system of importing labor and its per capita carbon emissions, the highest in the world. "Dubai is finally financially bankrupt – but it has been morally bankrupt all along. The idea that Dubai is an oasis of freedom on the Arabian peninsular is one of the great lies of our time," he writes. "The people who really built the city can be seen in long chain-gangs by the side of the road, or toiling all day at the top of the tallest buildings in the world, in heat that Westerners are told not to stay in for more than 10 minutes. They were conned into coming, and trapped into staying."