The financial crisis has come full circle. Having started in Florida, home of speculative property development and sub-prime lending, it is culminating in Dubai, the most fragile of the United Arab Emirates.
The ambiguity over the financial strength of Dubai, a trading entrepot that relies on Abu Dhabi, the richest of the emirates, for financial backing ended on Wednesday with the disclosure that it wants investors to agree a debt standstill at Dubai World, its flagship holding company.
The news has shocked investors and follows a crash in Dubai, especially at properties such as Palm Islands, an offshore development overseen by Nakheel, the property arm of Dubai World.
Somehow, it is apposite that Dubai should be struck like this two years after the housing crash in Florida, and other US states such as Arizona, rippled through global financial markets.
Like Florida, Dubai is a resort centre to which people from Europe and Asia go for holidays, and to buy beachside apartments. They also have in common property development on reclaimed land – much of Florida was once swampland and Dubai has extended itself into the Gulf.
Florida, however, has one advantage over Dubai. The financial support of the US government is not in question, even if Florida’s finances were affected by the crash.
In Dubai’s case, overseas investors hoped that, if the worst came to the worst, Abu Dhabi would stand behind its brother emirate. It seems that their assumption was incorrect.
The ratings agency Moody’s summarised the event thus:
“Moody’s has always highlighted that the way the government will deal with Nakheel’s upcoming liabilities will represent a litmus test for Dubai. Although Nakheel is not rated by Moody’s, it sets a major precedent for a high-profile, seemingly strategic company facing debt repayment difficulties and thus relying on the government for support. A restructuring of its obligations would indicate that the government is prepared to allow a government-related issuer to default on its obligations.”
While Latin American countries such as Brazil have emerged intact from the financial crisis, this threatened default has emerged, of all places, in an Arab oil state.
