Dubai debt meltdown -- another financial crisis?

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BEIJING, Nov. 29 (Xinhua) -- Dubai, an oasis in the Persian Gulf, has woken up to a debt
crisis of its state-owned investment flagship Dubai World, a firm known for its slogan -- "The
Sun Never Sets on Dubai World."

The state-owned conglomerate in the United Arab Emirates Wednesday asked for a delay
in repaying some of the 60 billion U.S. dollars it owes to creditors, causing panic and
concerns across the world.

Has the sun set on Dubai World? Will the crisis hamper the world economic recovery and
spill over to the global financial sector? Or will it trigger another economic meltdown?


  


Amid fears that Dubai World could delay its massive debt payments and shock waves
around the world's already brittle stock markets, the world leaders played down the troubles
and showed their confidence in global economy.

Although Britain comes in forefront with many of its commercial banks exposed to the
Gulf emirate's financial problems, its Prime Minister Gordon Brown was more ready to call it
a setback, which he said was "not on the scale of previous problems we have dealt with."

"The world financial system is stronger now and able to deal with the problems that arise,"
he added.

French Prime Minister Francois Fillon said the Gulf had the resources to ensure the world
would not sink into a second round of turmoil.

Their words were echoed by Sheikh Ahmed Bin Saeed al Amktoum, chairman of Dubai's
Supreme Fiscal Committee, who said that "the government is spearheading the restructuring
of this commercial operation in the full knowledge of how the market would react."

However, some analysts voiced their concerns over Dubai's stance to downplay its financial
predicament, saying that a lack of details on the crisis would raise concern over the problem.

Likewise, many heavyweight investment institutions also cast doubts on the current default
by warning that the Dubai debt might be over 80 billion U.S. dollars. Some observers even
dubbed this scenario "financial crisis 2."

Following the Dubai World's announcement, Standard & Poor's downgraded its ratings of
several Dubai government-related entities.

A Saudi economist said "it is a very serious and severe problem that is likely to shake up
the Gulf financial system as a whole."





 

In "My Vision," a book written by Sheikh Mohammad bin Rashed al-Maktoum, the Dubai
ruler depicted his dream that Dubai, always seeking for innovation, would become a world
economic center.

But the debt crisis would almost wreck his dream.

With a rapid development drive, Dubai, a tiny emirate, has in recent years transformed
itself into a regional financial and tourist center.

Unlike its oil-rich neighbors, Dubai adopted a different path of development, where the
skyrocketing buildings and the masses of foreign workers it employs serve as witnesses.

Instead of naming it the beginning of a new financial turmoil, a U.S. consulting company
said in its report the latest crisis was an overdue burst of assets bubbles.

Nevertheless, many believed Dubai's growth mode was still recommendable as it had made
a good use of its geological advantages and successfully spurred up its economy.

Some held that such problems were inevitable in Dubai's economic transformation. Kit
Juckes, chief economist of the London-based currency trading group ECU, called it a "one-off
bubble" since "nowhere else has there been so much extravagant construction."

   

  


As consequence of the debt woes, crude oil prices experienced the deepest slump on Friday
since January. Meanwhile, property prices in Dubai almost downed by half. Wall Street
retreated amid a global sell-off as investors fled risk assets.

Some saw that the market was overheated this year and the debt crisis was just a trigger for
market correction.

Mohamed El-Erian, chief executive officer of the U.S. Pacific Investment Management
Co., said Friday that the troubles in Dubai served as a catalyst for "overdue correction" in
stocks and other risk investment market that has been depending on liquidity injection.

"While many have acknowledged in the last few weeks the growing wedge between market
valuations and economic and corporate realities, few have been willing to take their equity
exposure down," El-Erian said.

In tackling the global financial crisis, countries across the world were keeping low interest
rates and substantial liquidity in their financial sectors. Nonetheless, property bubbles were
 simmering behind these seemingly well-performed markets.

The view was supported by Templeton fund manager Mark Mobius, who predicted that the
Dubai crisis might trigger a 20-percent stock contraction on emerging markets.

As real estate market accounts for a large part of Dubai's economy, some observers warned
that the crisis could bear large on its economic well-being.

Richard Bove, a veteran banking analyst at the U.S. Rochdale Securities, said that Dubai
would probably sell its good real estate at a low price and cause a chain reaction in the whole
market.

Figures form the London-based Deutsche Bank showed that house prices, both commercial
and residential, have halved since August last year.

Despite Dubai World's pledge to mitigate the risks for its investors, the losses in its real
estate and stock market would make it hard to have the promise delivered.

Analysts from the Bank of America cautioned that if the Dubai crisis spread to other
emerging markets, the world economic recovery could see a major setback.
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