Dubai brings down the world

The Dubai government stirred up markets this week by its decision to delay the debt payments which its flagship holding company and corporate biggie, Dubai World owes. The company is under heavy debts tallying up to tens of billions that were used to fund the real-estate projects from the Middle East to Las Vegas. The surprising move has come at a time when many economic indicators, including oil prices, were showing positive signs.

The debt crisis in Dubai is raising a new fear amongst investors throughout the world- that of a potential government default by nations which are heavily indebted. Investors feared on Friday that this move by the Dubai government would bring the global markets into the same kind of chaos which was witnessed in the early part of this year. But while losses were reported in Asia, the markets began to get stable as the trading day progressed in Europe and the U.S. The European stocks finished higher by 1.2% and the Dow Jones Industrial Average closed just 1.5% lower by the end of Friday.

The effect was felt deeper in the sovereign-bond market. On the concern that emerging-market nations might have difficulty in paying back their debts despite the global economy coming out of recession, the cost of insuring against defaults rose in Turkey, Bulgaria, Russia, Brazil, Mexico and Hungary.

According to investors, an Islamic bond, sukuk, issued by one of Dubai world’s subsidiaries, fell to 57 cents on Friday from 110 cents on Wednesday. Dubai’s troubles are not limited to the Middle East, and have raised concerns over the ability of Greece and Hungary to pay off their debts.

The credit derivates market also highlights the concern over the creditworthiness of the governments, as investors are insuring themselves against bond defaults by paying prices which are much higher.

Dubai’s example shows how quickly countries can slide off the path to recovery and land into trouble. According to analysts, it would take years for the Dubai real estate market to come back to levels as high as they were in 2008.

The investment and spending spree reached its peak in 2008 when oil reached $140 a barrel. But, the slide towards Wednesday’s standstill had begun later that year by the time of Dubai’s biggest bash at the opening of a hotel on the man-made Palm Island. Since then, international players started to bow out of Dubai’s property market, prices descended, projects began being cancelled, and government and private developers began shedding workers and stopped bill payments.

Via Global Crisis News.

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