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Goodbye, Dubai?

Scott Jagow Dec 1, 2009

Maybe you’ve heard this Wall Street joke: “Dubai, Mumbai, Shanghai or goodbye.” Once upon a time, troubled American investment banks that needed cash fast could get it from one of those places, easy peasy. Now, the applicable word seems to be… queasy.

At least in the Middle East. For the 2nd straight day, the financial markets in Dubai and Abu Dhabi have tanked. Dubai stocks are down 12%, an aftershock of the news that state-run supercompany Dubai World needs to delay some debt payments. Today’s market drop prompted Dubai’s ruler to make his first public statement about the debt problem:

“Our economy is strong and solid and consistent,” he told Al-Arabiya satellite television, adding markets were overreacting because of “a lack of understanding about what is happening in Dubai.” He did not elaborate.

Okay, we’ll elaborate then. What’s happening in Dubai is the same thing that’s happening in this country — a reckoning. Dubai’s fantasyland was built on easy credit, the same way Wall Street, American homeowners, American homebuilders, shopping center owners and banks built their houses of cards. The bill has come due.

Investors were shocked by the news out of Dubai. Why? People have been warning about this for some time now. Take a look at Marketplace’s coverage from Dubai, The Middle East at Work, in March 2008. As host Kai Ryssdal said on Marketplace yesterday: “Everyone knew what was happening there was crazy; but nobody seemed to care.”

The New York Times’ Andrew Ross Sorkin was there a couple years ago as well:

With hours to kill before a late-night flight, I ventured over to the Ski Dubai indoor ski run. It’s a pretty good bet that a city with an average temperature of 90 degrees and an indoor ski slope is probably living a little too large. On one ride up the chairlift, I sat next to a 7-year-old from London who had just moved to town. With a big grin, he proudly told me that his father was in “the real estate business.”

We’ve told you what’s happened to some of those people.

Predictably, Dubai might need a bailout from its neighbor, Abu Dhabi. Moral hazard knows no boundaries, even geographical ones. More from Sorkin, emphasis mine:

Just as the United States stood behind its banks, in part, to avoid losing the confidence of foreign investors, Abu Dhabi might have to do the same.

That had to be what Citigroup, with its firsthand expertise with bailouts, must have been thinking when it lent $8 billion to Dubai last year. Oh, and here’s an interesting fact: Citigroup made the loan to Dubai on Dec. 14, 2008. Take a look at the calendar — that’s after it received tens of billions in TARP funds. Citigroup’s chairman, Win Bischoff, said at the time, “This is in line with our commitment to the U.A.E. market in general, and reflects our positive outlook on Dubai in particular.” Good call.

But lest the world “overreacts,” in the Financial Times,
Sultan Sooud Al Qassemia, a fellow at the Dubai School of Government, says this:

It is already clear that Dubai’s future is not what it used to be. But that does not necessarily mean it is facing a bad future. Last Wednesday’s convulsion marked a significant milestone in the financial history of the emirate, and a very different Dubai will now take shape. To overcome the present situation, hard decisions must be made…

The truth is, Dubai took advantage of easy credit and poured it into developing the best infrastructure south of the Mediterranean Sea in any emerging economy. Had it not been for the less strategic investments in luxury department stores and other similar assets in the west, then Dubai would have been in a much better shape today.

But like everyone else, it wanted to eat its cake and have it too. It may be fitting that a certain Western city hopes one of those Dubai projects will be a savior for it now — a mega-casino/resort that opens this week in Las Vegas.

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