Last week's news that Dubai World, an arm of the emirate of Dubai, was seeking to reschedule its debt sent some shivers through the market. (As we noted, it didn't take a whole lot to move the market on those days of such low volume.) There were also many misconceptions that arose, in part because news is received so sketchily over a long holiday weekend.
First of all, it wasn't the emirate that is having trouble with its debts; it's a wholly owned but separate corporation. Dubai World bears a similar relationship to the Dubai government that Fannie Mae and Freddie Mac pay to our own, except that its business is investing in real estate rather than buying up mortgages.
Many people had expected that the emirate itself would cover Dubai World's debts if the real estate entity got into fiscal trouble, but that has turned out not to be the case. That shouldn't be so surprising - one reason wholly owned entities are set up in the manner of Dubai World is so that the government is shielded from things like bankruptcy.
Like a lot of locales here in America, Dubai crazily overbuilt during the real estate boom of the past decade. One of seven members of the United Arab Emirates, Dubai tried to build itself into another Hong Kong, a little world power. One specialty was man-made islands, one of which was to have its own Trump Tower had been planned (canceled earlier this year). There was even an indoor ski run along the shores of the Persian Gulf. And like a lot of other places, when the crash hit, Dubai couldn't handle the losses.
So now Dubai World is left with $59 billion in liabilities. That may sound like a lot, but the International Monetary Fund estimates that U.S. and British lenders will lose $1.8 trillion between 2007 and 2010. So it's not Dubai itself that presents a danger, but rather the idea that other governments may follow. But until that happens, this is merely another aspect of the real estate crisis, not a governmental crisis.
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