A recent article over on Knowledge @ Wharton last month asked if Dubai World’s Debt Default Could Spark a Crisis in the Middle East and Beyond after Dubai World announced in late November that it wanted a six month delay on payments on 26 Billion in debt. In other words, it’s asking for a delay on a loan amount that is greater than the annual GDP of over 110 countries! And, according to the article, that’s just the debt it attributed to it’s overly ambitious real estate subsidiary, Nakheel, which, not satisfied with the construction of Islands in the shape of Palm Trees (Jumeirah, Jebel Ali, and Deira) had to go and construct a massive Waterfront, The World (Wikipedia), and, now, The Universe (Wikipedia).
Needless to say, the announcement threw the markets for a loop. As per the article, the Dow Jones Industrial Average quickly fell 1.5% (155 points), European stocks plunged, and oil prices plummeted. Between the end of November 25 (when it hit Bloomberg) and December 9th when the K@W article appeared, a flurry of news articles hit the wire trying to understand what it all meant, which so far has been very little beyond the initial shock. But given that negotiations are still ongoing and nothing has been finalized, a bigger shock could be coming, especially since Dubai World as a whole has debts totalling 59 Billion, which is an amount greater than the annual GDP of over 130 countries! The detailed analysis from the K@W article was that Dubai World’s lenders will work out a restructuring and will supply funds needed to complete the real estate projects that have stalled, because the buildings will be more valuable finished, quoting the burst real estate bubble that Florida suffered in 1926 (and how the excess building eventually drew people to Florida from around the US), but nothing is set in stone. There’s no guarantee that, in this economy, the lenders can even afford to wait six months for their structured payments, yet invest even more money in very expensive (and egotistical) projects that will take quite some time to sell. After all, how many people left can afford to pay 15 Million to 50 Million for their own island? With the major studios shelving scripts left and right, even “A” list actors are having trouble getting steady work at their usual pay rates! (And if the doctor had 15 Million to invest, he’d be launching new companies offering useful software and services [as they’d have revenue potential], not buying an over-priced man-made piece of real estate that really wasn’t needed in the first place.)
Now, while it’s likely that Wharton Finance Professor N. Bulent Gultekin is right in that problems arising from Dubai World will for the most part be contained in Dubai rather than affecting the region, largely because Dubai is the most highly leveraged country in the area, it’s important to note that if Dubai World did fail, it would be the largest government default since the approximately 100 Billion Argentine debt crisis of 2001 and that could spark a chain reaction (like there was during the Russian default crisis of 1998) as there has been a very big jump in government debts around the world as of late. And if a country like Greece, which has a lot of debt mostly held by lenders outside the country, fell, we could be saying goodbye to a quick recovery and hello to a nice, long depression. I just hope the financial decision makers think about this before they raise national debt limits again and risk plunging the world markets into turmoil.