Jamie Stewart: Europe should not count on an oil-backed Dubai bail out

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The Independent Online

The hit taken by global financial markets following state-owned Dubai World’s request to default interest payments on its £49 billion debt for six months has lead analysts to question the validity of any global economic recovery.

Echoes of Lehman Brothers swept menacingly though Europe on Thursday in the wake of the request, amid fears of the exposure of banks to the debt; the FTSE 100 tumbled 3.2 per cent – its biggest one day fall since March – while European shares slumped 2.1 per cent.

Many analysts shrugged off the long-term repercussions of Dubai’s request, on the grounds that oil rich neighbour and fellow UAE federation member Abu Dhabi would stump up the necessary cash to save Dubai’s face – and by extension – the federation’s reputation on the world stage.

But the composition of the UAE economy is a rare – and therefore barely tested – model. Each of the seven component emirates retains the physical rights to its natural resources. And neighbouring Abu Dhabi sits on no less than 95% of the UAE’s oil reserve.

The federation is considered ‘rich’ in terms of per-capita wealth, but those reserves of liquid cash overwhelmingly reside in Abu Dhabi’s coffers. This leaves Dubai, a city built not on the back of oil, but on high-end real estate and 5-star tourism, flailing badly in the wake of global recession.

In the deserts of the Middle East, flora is rare, bar the plastic palm trees at Dubai International Airport; yet if ever a city was out on a limb…

Abu Dhabi has already bailed out Dubai to the tune of £6.1 billion through a bond which it underwrote in February via the UAE central bank, an institution which unsurprisingly almost entirely relies on Abu Dhabi’s wealth.

And Abu Dhabi has itself embarked on an economic diversification programme of monster proportions, with the aim of increasing its population three-fold by 2030. It is building motorways; museums; entire towns; and even a new administrative capital, as spelled out in its Plan 2030.

Trebling the size of your city in two decades does not come cheap, and there may not necessarily be billion-pound wads of non-ringfenced cash floating around the corridors of power.

The question must now be asked, as world stock markets dip back towards an increasingly fragile state: Is Abu Dhabi prepared, indeed is it able, to step up to the plate again?

The US government decided that, in the case of Lehmann Brothers, lessons were best learnt the hard way; that support had its limits, beyond which mismanagement, overt confidence and undue risk were to be exposed for what they were – the unsavoury consequences of extreme profiteering.

The UAE’s Emirates are run by ruling families, with the right to dictate passed down through bloodline. Rumour has abounded for years concerning the brash projection of Dubai, on the part of its ruling family, in the eyes of Abu Dhabi’s ruling family.

The ability of the participants of this crisis to navigate a way out, without charging headlong into the other vessels potentially caught in the eye of the storm – including the good ship RBS and Lloyds, each part-owned by the UK tax-payer – may depend entirely on whether or not the two city-states can reach a multi-billion pound deal to usurp all agreements that have gone before.

On the other hand, the post-modern and pre-renewable energy-blessing that is extreme but limited oil wealth may lead to Abu Dhabi deciding that enough is enough, and that Dubai’s – and by extension the world’s – lesson in credit restraint is best learnt the hard way.

Lehman is gone, but not forgotten, and the financial institutions of Europe should not bank on big brother’s philanthropy. If hard lessons were deemed good enough for Lehman, they may be deemed good enough for Dubai.