Sean O'Grady: Who'll be the next victim? Take your pick

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The Independent Online

Dubai is not the first state, and will not be the last, that finds itself in difficulties in this financial crisis.

The pattern has become an increasingly familiar one: a smaller nation borrows huge amounts of money from abroad and uses the funds to "invest" in its economy. In Dubai's case it was tower blocks and luxury homes, but it could have been anything. Such activity can be undertaken by governments or by private sector companies and banks, or a combination of these, but it leaves the state in a dangerous position: a large balance of payment deficits and an enormous stock of debt owed in currencies other than its own.

Thus Iceland's banks managed to borrow – or leverage, in the jargon – their collective liabilities to somewhere near seven times Iceland's national income. When the banks went bust the country went down with them. Hungary, the Baltic Republics, the Ukraine, Pakistan and a few others have followed; huge, unsustainable debts that could no longer be simply rolled over because the banks were so bust and frightened that they would not lend any more (just as they won't give British first-time buyers a mortgage; the same principle of prudence applies).

The invariable solution is an appeal to the International Monetary Fund and a rescue package, sometimes with painful conditions attached. Dubai is fortunate in having the mega-rich Abu Dhabi as its neighbour and partner in the United Arab Emirates, and likely saviour. So western banks may escape the sort of huge losses that seemed possible a few days ago.

But there is more of this sort of horror to come. The managing director of the International Monetary Fund, Dominique Strauss-Kahn, said at the start of the week that – even after all the pain we've been through – the banks had yet to declare about half of their losses from the financial crisis.

The IMF expects write-downs in the financial sector of another $1.5 trillion (£0.9bn) bringing the estimated total to $3.4 trillion. The IMF also says that US banks have written down 60 per cent of their non-performing troubled assets, but the EU's institutions have written off only 40 per cent.

So that's $900bn more in losses for US banks, and $1.9 trillion more for European banks. The current guess is that many German, Austrian, Swedish and Dutch banks – less so British ones – have significant bad debts in eastern Europe and elsewhere in the continent that have yet to come to light.

The really worrying thought, as you run through the list of countries with over-large banking sectors, rapidly rising national debt, burst property bubbles and threatened credit ratings, is the next sovereign debt crisis might not be in one of the usual suspects, such as Greece, Ireland or Bulgaria, but the UK itself. The world may soon be asking itself who would be mad enough to invest in or lend to that funny little country. (Actually Dubai, which bought lost of ports and properties over here, but that's another story).

Long arm of Dubai: What they own

*London Stock Exchange

Nasdaq made several failed attempts at hostile takeovers of the London Stock Exchange in 2006. A year later, it capitulated and sold most of its stock to Dubai.

*Grand Buildings

Bought for £155m in 2005 by an investment company indirectly controlled by Dubai, it has tenants including Reed Elsevier and Enterprise Oil.

*'QE2'

Owned by the Nakheel division of Dubai world, the QE2 was bought for £50m, to use as a floating hotel off one of the palm islands. She's currently due to sail to Cape Town to help out at the World Cup.

*The Adelphi in the Strand

A 13-storey central London office block with tenants including the Department of Work and Pensions.

*Cirque du Soleil

Dubai acquired a 20 per cent stake in the Canadian circus troupe last year, although no price was mentioned.

*Merlin Entertainments

Dubai has a 17 per cent stake in Merlin, the second-largest operator of amusement parks in the world after Disney. It owns Alton Towers, Chessington World of Adventures, Legoland, the London Eye and Madame Tussauds. Experts value it at a potential £2bn.

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