Dubai Debt Crunch is a Bursting Bubble

Dubai, one of the seven members of the United Arab Emirates, has had a good run for a sheikdom without much oil. The locals based that success on finance, real estate and tourism. They built an indoor ski slope, the world's tallest building and an archipelago of man-made islands, almost all of it on credit. The bill has come due, and the investors may not get their December 14 payment from Dubai World, one of the three government investment corporations. Whether Dubai World is bankrupt or merely insolvent is a minor question. The fact is very few investors will offer much money for future projects in the Middle East for quite some time. This is bad in a number of ways.

First and most immediate is the risk that the payment due doesn't get made on time or in full. Some investors can provide a bit of forbearance, but some may need that money when it was promised. Depending on how many need how much how soon, the financial system of the region is at risk. Outside the region, the world should be all right. "I don't think the collateral damage is going to be that great," said Jeffrey Saut, chief investment strategist at Raymond James. "People will dig into this over the weekend, but I think balance sheets have healed enough to withstand a shock like this."

Second, investors aren't very savvy about differences in countries with which they are not familiar. For example, investments in Saudi Arabia or Jordan could be deemed credit risks merely because they are in the same general area. John Sfakianakis, chief economist at Saudi-based Banque Saudi Fransi-Credit Agricole Group told MSNBC, "Right now we're still seeing the impact of this, and the impact will be that everybody is being negatively perceived."

Third, one must ask what happens in the Islamic world when the relatively modern example of Dubai falls on its backside. The jihadists get a huge propaganda win. They can say in the mosques and on the Internet, "see what comes of trying to be modern?" With even fewer job opportunities for young educated people, more radicalism could ensue.

What is most disappointing about this situation is that is was entirely avoidable. Middle Eastern finance is not terribly transparent, and investors/speculators were too trusting. Last year, Dubai suffered hugely from the global financial mess. Yet earlier this month, Sheik Mohammed bin Rashid Al-Maktoum (the ruler of Dubai) told investors who questioned the situation to "shut up." Previously, he had assured investors that "we are all right" and "we are not worried." Yet if he has a recovery plan, he's keeping it to himself. A few more direct questions with a few more direct answers might have slowed the growth of Dubai, but they would have also prevented this current unpleasantness.



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