Global investors are in a giant huff over Dubai's decision to allow its flagship private company, Dubai World, to seek a six-month standstill (implying at least partial default) on payments on $26-billion (U.S.) in debt. What exactly did investors expect when they purchased bonds in companies with names such as Limitless World, one of Dubai World's real-estate subsidiaries? Talk about a bubble mentality.
The idea, I guess, was that the emirate's government would stand behind every loan, no matter how risky. And if Dubai didn't have the money, its oil-rich sister state Abu Dhabi would cough it up.
An absurd expectation, but hardly more improbable than many of the other massive bailouts we have seen recently. What really upset investors, of course, was the realization that, yes, untenable debt guarantees will have to be withdrawn some day. Eventually, an overleveraged world is going to have to find a way to cut debt burdens down to size, and it won't all be pretty.
There are those who revel in what they see as a comeuppance for Dubai's outsized ambitions. I do not share this view. Yes, Dubai, with its hotels, man-made islands and roof-top tennis courts, is a real-world castle in the sand. Yet, it has also shown the rest of the Middle East what entrepreneurial spirit can accomplish.
Its airport has become a global hub of such significance that German regulators recently had to force Emirates Airlines to raise its rates to Frankfurt, lest national champion Lufthansa lose too much business. And with its relatively open goods and capital markets, Dubai has become a trading hub for the entire Middle East, plus parts of Africa and Asia. On the eve of the financial crisis, other Persian Gulf states were looking to it for insight into how they might diversify their economies when the oil runs dry.
Yes, Dubai is an autocratic state where finances are tightly and secretively controlled. Indeed, lack of detailed information on the emirate's finances was a central reason why the Dubai World default came as such a shock.
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