Just how important is the debt crisis in Dubai? There are differing opinions among economic analysts, some saying the Gulf state may just be the tip of an iceberg of hitherto undreamed-of bad debt, while others insist it is merely an isolated regional problem for a smallish city state to grapple with.“In this climate of financial difficulty, what Dubai is doing is what’s been done in other countries around the world. It’s a Keynesian concept, an old Keynesian concept, running a deficit during difficult times. And I think Dubai needs to finance its deficit through selling bonds,” says Kamel Wazne of the American University of Beirut. One leading trader said the atmosphere following Dubai’s shock announcement was “absolute paranoia”, but in fact after slumping midweek Europe’s stockmarkets have strongly rebounded today. Specific knock-on effects are still to feared, however: “There’s a big worry that Arab investors may sell their automobile shares, that there will be a slump in construction, that promoters will stop paying creditors, or that banks have agreed too many loans. But we survived the financial crisis, and we’ll survive this problem as well,” says Robert Halver of Baader Bank. Banks outside the Gulf have been quick to downplay their exposure to Dubai’s total 80 billion dollar debt, of which Dubai World, the company in the eye of the storm, holds around three-quarters of the total. Oil weakened because Dubai’s woes raised the prospect of a slump in world growth, and a subsequent fall in demand, and traders shifted to risk-avoidance strategies. Bonds reaped full advantage of the trend. The dollar also rose in the search for safe assets, but gold weakened, despite several recent large state purchases by nations building reserves. In the current frenzied market where rumours can set off disasterous chain reactions, it seems some things are worth more than the yellow metal.
Is Dubai debt iceberg or drop in the ocean?