Leading article: The collapse of an economy that was built on sand

The spectre of default in Dubai has serious implications for us all

Share
Related Topics

In the years of the boom, Dubai set about building with an ambition that would have made even Ozymandias blush. Artificial islands full of luxury villas, the world's tallest tower, an underwater hotel, even a stone-by-stone recreation of the French city of Lyon – no project was too extravagant, some would say vulgar, for the construction magnates of the emirate.

But this was a project built on the shifting sands of credit. Foreign capital poured into Dubai as its ruler, Sheikh Mohammed Bin Rashid Al Maktoum, set about turning his nation into the financial, tourist and sporting hub of the Gulf. In less than a decade, Dubai managed to accumulate foreign liabilities of $80bn. Some estimates put it still higher.

But last year's financial storm brought that party to an end. Since last autumn, Dubai property prices have fallen by more than half. Hundreds of building projects have been abandoned. Thousands of construction workers and other workers have been laid off. As in many nations that experienced intoxicating booms, the hangover has been especially painful.

And now the spectre of bankruptcy has appeared. Dubai World – a state-owned investment conglomerate which owes investors some $22bn – said this week that it will not be paying back any money to creditors for six months.

This announcement has also sent tremors through global financial markets. Nothing panics investors more that the revelation that what they thought was a safe bet is nothing of the sort. Dubai's creditors had assumed that the kingdom's oil-rich neighbouring states in the United Arab Emirates would never allow Dubai to renege on its liabilities.

They had believed the assurances of Sheikh Maktoum that Dubai's debts would be repaid in full. Dubai's receipt of a $10bn loan from the UAE central bank in February was seen as a sign that, despite the downturn, the rescue party would soon be on the way. But Dubai's sovereign guarantee of investors' money, it would seem, is not made of cast-iron after all.

In the end, it does seem likely that Dubai's wealthy neighbours will finance its debts. It is not in the interests of any of the Gulf states to allow Dubai to default, since no other nation would invest in the region again after such a breach of trust. However, this week's announcement might well be a prelude to Dubai's creditors being forced to accept less back than they were originally promised.

This would constitute only a "technical" default, but its wider economic knock-on effects should not be underestimated. All of Britain's major banks, from Barclays to the Royal Bank of Scotland, are rumoured to be exposed, to some extent, to Dubai debt. If they are forced to write down loan assets, that could have serious ramifications for our own economy. The weaker the banks, the less inclined they are to lend to domestic businesses.

Such write downs would be ominous for the global economy too. Confidence in credit markets, which has been creeping up since last autumn's meltdown, is likely to take a fresh pummelling as investors ask themselves where might be next. Those animal spirits that have driven up stock markets this year could yet give way to fear.

Dubai's boom was one of the gaudy symbols of the era of excess. The torments of the emirate's creditors in the bust seem likely to determine how traumatic it will be for all of us as we retreat into a more modest age.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Ashdown Group: Helpdesk Analyst

£25000 per annum: Ashdown Group: An established media firm based in Surrey is ...

Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

Ashdown Group: Head of Finance - Financial Director - London - £70,000

£70000 per annum: Ashdown Group: Head of Finance - Financial Controller - Fina...

Recruitment Genius: Business Development Executive - Nationwide - OTE £65,000

£30000 - £65000 per annum: Recruitment Genius: This small technology business ...

Day In a Page

Read Next
Ice skating in George Square, Glasgow  

How many Christmas cards have you sent this year?

Simon Kelner
 

Al-Sweady Inquiry: An exercise in greed that blights the lives of brave soldiers

Richard Kemp
Calls for a military mental health 'quality mark'

Homeless Veterans campaign

Expert calls for military mental health 'quality mark'
Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

Meet Racton Man

Analysis shows famous skeleton was a 6ft Bronze Age superman
Garden Bridge: St Paul’s adds to £175m project’s troubled waters

Garden Bridge

St Paul’s adds to £175m project’s troubled waters
Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

Stuff your own Christmas mouse ornament

An evening class in taxidermy with a festive feel
Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

Joint Enterprise

The legal doctrine which critics say has caused hundreds of miscarriages of justice
Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

Freud and Eros

Love, Lust and Longing at the Freud Museum
France's Front National and the fear of a ‘gay lobby’ around Marine Le Pen

Front National fear of ‘gay lobby’

Marine Le Pen appoints Sébastien Chenu as cultural adviser
'Enhanced interrogation techniques?' When language is distorted to hide state crimes

Robert Fisk on the CIA 'torture report'

Once again language is distorted in order to hide US state wrongdoing
Radio 1’s new chart host must placate the Swifties and Azaleans

Radio 1 to mediate between the Swifties and Azaleans

New chart host Clara Amfo must placate pop's fan armies
Homeless Veterans appeal: 'It's life, and not the Forces, that gets you'

Homeless Veterans appeal: 'It's life, and not the Forces, that gets you'

The head of Veterans Aid on how his charity is changing perceptions of ex-servicemen and women in need
Torture: It didn't work then, it doesn't work now

Torture: It didn't work then, it doesn't work now

Its use is always wrong and, despite CIA justifications post 9/11, the information obtained from it is invariably tainted, argues Patrick Cockburn
Rebranding Christmas: More public bodies are refusing to give the festival its name for fear of causing offence

Rebranding Christmas

More public bodies are refusing to give the festival its name for fear of causing offence. They are missing the point, and we all need to grow up
A Greek island - yours for the price of a London flat

A sun-kissed island - yours for the price of a London flat

Cash-strapped Greeks are selling off their slices of paradise
Pogues could enjoy fairytale Christmas No 1 thanks to digital streaming

Pogues could enjoy fairytale Christmas No 1 thanks to digital streaming

New system means that evergreen songs could top the festive charts
Prince of Wales: Gruff Rhys on his rock odyssey, and the trouble with independence

Prince of Wales: Gruff Rhys

He is a musician of wondrous oddity. He is on a perpetual quest to seek the lost tribes of the Welsh diaspora. Just don't ask Gruff Rhys if he's a national treasure...