Will The Sun Never Set on Dubai's Debt?

(Nov. 30) -- There may be something in the financial woes of a Persian Gulf emirate that prompts gloating in the West, some latent ill will, perhaps, that dates from the oil shocks of the early 1970s. But the meltdown in Dubai, now shaking markets worldwide, is as American as a subprime mortgage loan and potentially just as risky.

The head of Dubai's Department of Finance on Monday told Dubai television that the government won't guarantee the roughly $60 billion of debt incurred by Dubai World, the state-backed real estate, transport and investment conglomerate that has made Dubai a showcase of over-the-top construction in the last decade. At the very least, the building boom that engendered the iconic Burj Dubai, which will be the world's tallest building when completed early next year, has come to a crashing halt.

The announcement that Dubai World is on its own only added to the uncertainty that slammed financial markets last week in Europe, Asia and the U.S. when Dubai told creditors the conglomerate would put repayments on hold until May. The news spooked banks and business partners with significant investments in the region, but also investors everywhere who wondered if this augured a new round of financial collapse on the back of reckless unsecured spending.

The Central Bank of the United Arab Emirates, the currency-issuing bank for Dubai, Abu Dhabi and five smaller emirates, said it would stand behind all domestic and foreign banks working in the UAE. But the statement from bank headquarters in the more stable emirate of Abu Dhabi made no mention of Dubai World. If investors expected more reassurance Monday from Dubai itself, they were disappointed.

"Dubai World was established as an independent company. It is true that the government is the owner, but given that the company has various activities and is exposed to various types of risks, the decision, since its establishment, has been that the company is not guaranteed by the [Dubai] government," Abdulrahman al-Saleh, Dubai's Finance Department director general, said, according to The Associated Press. "Consequently, the company's dealing with the various parties has been on this basis."

Later, just after midnight on Tuesday in Dubai, Dubai World broke its nearly week-long silence on the matter to say it had begun "initial" talks with its creditor banks aimed toward restructuring $26 billion of the company's debt.

Shares trading in Dubai and Abu Dhabi tanked Monday, the first trading day following the Muslim holiday of Eid al-Adha. On the Nasdaq Dubai Bourse, shares in DP World -- the global ports operator owned by Dubai World -- fell 15 percent, even as the company managed to make a large bond payment, as the Financial Times reports. And another major Dubai World unit, real estate empire Nakheel, asked that some $5.25 billion of its bonds be suspended from trading. Meanwhile, the cost of insuring against a Dubai World default through credit-default swaps is rising -- an echo of the credit-market freezing in recent years.

Dubai World's debt itself is relatively small in the global financial system and seems to affect European banks more than those in the U.S. But as the financial meltdowns of recent years have shown, the problems may resonate further than the current market reaction, especially since Dubai World promoted itself as a poster child for globalization.

The company's motto now seems ominous: "The Sun Never Sets on Dubai World." If Dubai lacked the oil resources of Abu Dhabi and other neighbors, it didn't stint on promoting its ambition as a hub for petro-investment, grandiose construction, luxury recreation and regional networking. That glittering promise was enough to persuade oil-services giant Halliburton, for example, to relocate its headquarters there from Texas in 2007.

Dubai has also had sometimes star-crossed expansion plans, such as the intended purchase by DP World of a British port operator that managed five big U.S. ports. That deal blew up amid a political firestorm fueled by accusations that ownership by any entity from the same region that spawned al-Qaida would equal a security risk.

If Dubai World was just playing the capitalist game with the ports deal, its expansion in an era of easy credit now looks like one more example of the global crunch that has burned investors, banks, credit markets, consumers and homeowners in the last year and a half. Amid growing signs that that crisis is slowly abating, the big question raised by Dubai's current troubles is whether a financial ailment there can be contained or rather will infect other regions and hamper the global recovery.

The ratings agency Moody's, noting the doubts now raised about Dubai's future, was pessimistic, as Reuters reports. "The contagion effect for Abu Dhabi," Moody's said, "will be unavoidable." Many are concerned that it won't stop there.