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Today's Question: How will Dubai's debt default affect the world economy?

Thursday, December 3, 2009 | 12:01 a.m. CST; updated 6:30 p.m. CST, Thursday, December 3, 2009

Over the past decade Dubai has touted its resorts, skyscrapers and beaches to build a brand of luxury and extravagance. Its momentum fueled by Western investors, and last fall’s financial crisis exposed just how much the Arab emirate had borrowed — between $80 billion and $90 billion.

Despite the revelation, Dubai’s government took no action to reduce risk. Last week Dubai World, a huge government-owned conglomerate, announced it would delay repayment of billions it owes for six months. On Monday the holding company announced it will restructure about $26 billion of its debt.

Markets fell across the world after the statement last week, which was timed to coincide with both Thanksgiving and the Islamic celebration Eid al-Adha. Investors wondered if the default would escalate and what that would mean to the already bruised global financial system. Over the holiday weekend, no specified amount was mentioned, but some estimate almost $60 billion could be involved.

Dubai’s economy does not have enough clout to collapse the global financial system. But the emirate does have the regional sway to cause havoc in the Arab financial world. Even though the city of Abu Dhabi shares common investors with Dubai World and is the headquarters of many of the banks with stakes in the conglomerate, the emirate shot down speculation it would bail out Dubai World. Any help will be select and limited.

To calm anxiety the central bank for the United Arab Emirates said it will provide liquidity to all banks that do business within it. The United Arab Emirates’ decision will especially benefit banks in the United Kingdom that own more than $50 billion of the federation’s $123 billion in debt.

Driven by uneasiness, the Dow Jones industrial average fell about 150 points on Friday. Dubai World might have to sell some of the United States commercial real estate it has borrowed billions to acquire. In this market, the conglomerate might not be able to find buyers. The burst of the real-estate bubble means that even if it is successful, the transactions will cause the company some hefty losses. In addition to the millions Dubai World has in luxury hotels in New York and Miami Beach, it also owns CityCenter Casino & Resort in Las Vegas. The $5.4 billion development opened Tuesday, despite the default.

How will Dubai's debt default affect the world economy?

 


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