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Dubai too small to fail

with one comment

My friends from the Daily Reckoning newsletter and Dr. Marc Faber have concluded that the debt problems of Dubai are too small to bring down the global financial system (click here).

The Daily Reckoning says this is more of a Bear Stearns than a Lehman moment. For those with short memories, Lehman tipped off the global financial crisis last autumn, Bear Stearns was an earlier warning of what was to come.

Marc Faber came to the same conclusion, noting that the total impact of Lehman’s failure to the global financial system was around a $1 trillion, while Dubai World’s debts total not more than $60 billion.

$26bn debt

Indeed, in a note of clarification from Dubai World today we learn that only a mere $26 billion in bonds and debt – held by its two real estate subsidiaries Nakheel and Limitless – is actually suspended. Clearly Dubai is adding ‘the biggest PR error in global financial history’ to its long list of superlatives.

However, even to the super-rich like Dr. Faber and Bill Bonner who owns 100 per cent the Daily Reckoning as Dubai Government owns Nakheel and Limitless, although not (as the government has now clarified) its debts, $26 billion is not chump change.

It is quite enough to have the sheikhs buzzing back and forth in their helicopters over my office this morning. But it is true that as the Daily Reckoning reminds us there are bigger and more pressing debt problems in countries like Japan and the US to worry about.

Maybe then the Dubai debt crisis this week is a butterfly beating its wings rather than a case of apocalypse now. It is a $26 billion wake up call to the banking and investment community that all the problems of the global financial crisis have not been solved since March. That makes it a ‘sell’ in my book.

Is Dubai also too small to fail? It is true that Dubai’s debts could be easily paid off within the confines of the United Arab Emirates of which this emirate is a part.

The UAE’s leading emirate Abu Dhabi has eight per cent of the world’s most cheaply accessible oil reserves, and the world’s biggest sovereign wealth fund, the accumulated savings of 40 years of oil production. Abu Dhabi is really super-rich.

Abu Dhabi

All that appears to have happened is that Abu Dhabi has refused to bail-out Nakheel or Limitless. Nakheel has run up its debts creating three giant islands shaped like palm trees, two of which lie abandoned and the first not completed, as well as an archipelago of islands offshore shaped like a map of the world.

Plans to add the universe to this unusual constellation of real estate developments have been put on hold, and that is not a joke (see above). No wonder Abu Dhabi wants none of it. The economic viability of the first palm island is not yet proven, and the debts suggest it is good for attracting bank debt rather than profits.

That said the Daily Reckoning crew is campaigning for the world to face up to its debts and even suffer a depression to sort this mess out. Dubai looks ahead in taking its bad medicine now but perhaps is just too small to really fail.

Sadly the problems of the rest of the world might even challenge the wealth of Abu Dhabi which will surely become the buyer rather than lender of last resort.

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Written by Peter Cooper

December 1, 2009 at 8:44 am

One Response

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  1. “the biggest PR error in global financial history’…This statement is spot on. There is no doubt that the media dramatized the story and global markets overreacted…But it’s Dubai’s biggest mishap indeed, they gave them a perfect opportunity. They could have managed the situation in a much better way…don’t you think?

    Mo

    December 1, 2009 at 1:56 pm


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