Fallout from Dubai's boom and bust

Dubai is, says Victoria University economics and finance professor Roger Bowden, the second most vulgar city on Earth, behind Las Vegas. Even so, it's a close run thing.

The enduring memory for Craig Ebert, BNZ senior economist, is the vista of Dubai Airport's carpark filled with Mercedes Benz and BMW cars, keys still in the ignition, abandoned by expat owners in their haste to exit the Roman shell of Arab wealth.

More British rats fled the tiny emirate these past few months, it is said, than all the rodents on all the ships at the height of the Empire.

Dubai might be bust, its government clinging to the limited liability of its wholly owned investment vehicle, Dubai World, as it tries to manage an estimated US$140-billion (NZ$193b) fallout. Who knows where it will end, save to say, badly.

Markets were spooked, to the benefit of the New Zealand dollar for a day or two, but seem to have moved on. The Commonwealth Bank of Australia is expected to take a balance-sheet hit and its regulator is seeking further details about the extent of lending.

Reserve Bank spokesman Mike Hannah says New Zealand banks' exposure seems negligible but it is closely monitoring the situation because of the potential impact on global financial markets.
The striking artists' impressions for the future Dubai - a fantastical man-made archipelago, including representations of the galaxy and the globe - will go down in history as one of humanity's great follies.

Not since Henry Ford's disastrous attempt to replicate the ideal suburban American town in the heart of the Amazon (brutality, murder, ruinous loss!) has an entrepreneurial failure loomed as large in the public consciousness. All that was at stake  then was Ford's company; Dubai is a country, one of seven nations comprising the United Arab Emirates.

If you want a historical analogy, look no further than the once proud sovereign nation of Scotland. It was not the perfidy of the English that brought Scotland low in 1707 with the passing of the Acts of Union. The culprit was an investment entity funded by the cream of Scotland's elite, not unlike Dubai World. It squandered the national fortune on a scarcely believable venture into a territory named Darien on the Panama peninsula.

As Douglas Watt records in The Price of Scotland: Darien, Union and the Wealth of Nations, one of Europe's poorest nations conducted one of the most successful fund raisings in history to establish the Company of Scotland in 1695.

''Why the Scots believed they could maintain a settlement in the centre of the Spanish Empire remains one of the great mysteries,'' Watt writes. ''Why they believed permanent European settlement was possible in a tropical rainforest unfit for temperate crops and the site of lethal diseases is a mystery, too.''

But the Scots did believe, invested in huge numbers and lost the lot. The English Crown offered all their money back, plus interest to the 3000 shareholders and a guarantee to pay anyone owed a pension by the government  in all, a bribe to 15 per cent of the population. As poet Robert Burns lamented, ''We're bought and sold for English gold''.

Many observers expect oil and cash-rich Abu Dhabi to do an England on its indebted neighbour and make good on outstanding payments, although at what cost to Dubai's assets or sovereignty isn't spelled out. Dubai's ability to recently raise US$15b from Abu Dhabi banks and the United Arab Emirates central bank supports this belief. But an internal Goldman Sachs UK  memo on the crisis says hopes of a blanket rescue have been dashed, although an Abu Dhabi official says it will examine all commitments on a case-by-case basis.

If Dubai's debt won't be bought, what implications, then, for the global economy? Dubai World has about $60b in corporate bonds outstanding, owes foreign banks, particularly HSBC and Standard Chartered bank, about US$80b, and holds undisclosed derivatives positions, Goldman Sachs says. ''The risk of contagion effects is material - a permanent shock to the cost of capital in a relatively leveraged region would affect growth and profitability adversely,'' it warns.

Everyone is worried about the broader ramifications of Dubai's default. But, the investment bank concludes, ''the Dubai World story, with all the twists and turns that probably still lie ahead of us, belongs to the same genre of the real estate and credit epic started in 2007''.  Which is to say, fallout will be limited.

London-based UK senior economic adviser to UBS Investment Bank George Magnus says this is a rosy assessment: ''Contagion is likely to be a problem.''

Dubai's debt is part of an overall picture of over-reaching global government debt.

Magnus is picking another ratings agency panic ''and the US could then be in the firing line''. A second round of the global financial crisis anyone?

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justice   #1   11:23 pm Dec 14 2009

"Reserve Bank spokesman Mike Hannah says New Zealand banks' exposure seems negligible but it is closely monitoring the situation because of the potential impact on global financial markets.'

Mr Hannah is hardly credible in anyway shape or form to comment. He along with his RB mates couldn't even fore see the housing bubble or credit crisis for that matter a few years back. Infact his words to me when i confronted him about it were and i quote "like to see you do a better job". Well, i did see it and acted accordingly. No egg on my face

Charlie   #2   07:29 pm Dec 15 2009

Who is going to bail out New Zealand when the time comes? What sovereignty do we have left to trade anyway? With no armed forces to speak of, and few immigration or trade barriers, we are a virtually a common colony already.

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