Dubai Debt Rattles Global Markets

World markets have been shaken by fears that Dubai's main finance company may be unable to meet scheduled payments on a debt of more than $60 billion. Governments and financial analysts worry that the emirate could default and have an impact on the recovery of the world economy.

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Stock markets around the world wobbled today after reports of a crisis over debt in Dubai. A huge state-owned conglomerate, Dubai World, has asked to delay payment on billions of dollars of debt.

As NPR's Rob Gifford reports, there are worries the emirate could default and set back economic recovery worldwide.

ROB GIFFORD: Just when you thought it was safe to go back into the slowly thawing waters of the world economy, some over-leveraged Middle Eastern real estate company announces it can't pay its debt. It's not just any old Middle Eastern real estate company though, it's Dubai World, the state-backed investment arm of the city-state of Dubai. And it isn't just small change - $60 billon worth of debt. Dubai World is the company behind that big palm-tree luxury housing development on the sand banks of the Persian Gulf that's been photographed from outer space. The problem is, of course, that, at the moment, no one is buying luxury houses on sand banks shaped as palm trees that can be seen from outer space. Professor Avinash Persaud of investment analysts Intelligence Capital says never mind the credit default swaps that brought down Western banks last year, this is a slightly more traditional form of financial problem.

Professor AVINASH PERSAUD (Chairman, Intelligence Capital Ltd.): It's not surprising and it does indeed identify the fact that boom and bust really isn't just to do with fancy, complex financial instruments but just old-fashioned excessive borrowing and excessive lending and, of course, Dubai went through a mad spending spree in building the Dubai World new complex. And there is no surprise that this has now fallen into trouble as credit and liquidity is in short supply.

GIFFORD: But British Prime Minister Gordon Brown, who gained credit around the world last year for leading the fight to save the global financial system, said he was confident that this was not something that could take the world into a double-dip recession.

Prime Minister GORDON BROWN (Britain): I believe that we are satisfied the arrangements in place, the mechanisms that we've got in place, can monitor what's happening, can be sure that this is something that is both containable and is localized. And I believe that this is one of the things that we'll see over the next few months as the world economy returns to growth. But it is an event that can be dealt with.

GIFFORD: Emerging markets in the Middle East and elsewhere have attracted massive amounts of capital in recent years, amid investor enthusiasm for regions with rapid economic growth. This year, financial markets in Asia and Latin America have vastly outperformed those in the U.S. and Europe. Tiny Dubai, with its high-end economy geared to investors and tourists, is not typical of other emerging markets. But Christopher Davidson, an expert on the Middle East and financial world at Durham University in the U.K., says Dubai's problems could have broader repercussions.

Dr. CHRISTOPHER DAVIDSON (Durham University): Dubai is a massive white elephant. It's got serious problems, which are not really shared with other, say, regular states, or regular economies elsewhere in the world. It has a debt per capita that's much larger than anything we've seen anywhere else. However, it is going to make people more bearish about emerging markets in general. It's going to remind people, these are dangerous places to invest.

GIFFORD: As more information about Dubai World's problems emerges, and when global markets return after Thanksgiving and the Eid holiday in the Muslim world, the broader implications of the last few days will perhaps become clearer.

Rob Gifford, NPR News.

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