Dubai’s bubbly guarantee

So Dubai World is guaranteed after all! Abu Dhabi, Dubai’s richer neighbour, has stepped in with $10bn to help the property arm of the state-owned Dubai conglomerate, paying off the Islamic bond due today (and making a lot of money for some gamblers who snapped up the bonds on the cheap when everyone thought they would default – wonder whether any of them are connected to Abu Dhabi?).

Just a reminder of what Dubai ruler Sheikh Mohammed said two weeks ago: investors had completely misunderstood the distinction between being a state-owned company and being a state-backed company.

This company is independent of the government. This exaggerated media uproar will not affect our determination. It is only natural that we should oppose this campaign [to provide state support to Dubai World] and this huge media uproar

Hopefully investors will not just dismiss the whole thing as a bit of weird Gulf politics and return to business as usual. There is an important lesson from all this, and – strangely – it was put correctly by Sheikh Mohammed: “this company is independent of the government”.

Investors need to learn that they can lose their shirts by betting on government bail-outs. Not only for the sake of their own wallets: for the sake of the global economy. If “pseudo-sovereigns”, as companies with implicit guarantees like Dubai World and Fannie Mae are known, continue to be able to borrow at discounted rates, they will fuel the next disastrous bubble. Since the list of pseudo-sovereigns now includes most of the world’s big banks, it is time governments woke up to the dangerous behaviour caused by the expectation of endless rescues.

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Christopher Cook is an FT editorial writer. Before joining the FT in 2008 as a Peter Martin Fellow, he worked for three years for the Conservative party.

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