Investors Skittish Amid Dubai Debt Crisis

Troubles in the emirate of Dubai are making investors nervous around the world. A government-run financial conglomerate wants a time-out on debt payments, stirring fears of another bubble tied to risky bets on real estate. Dubai has invested in huge luxury projects at home and abroad.

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MELISSA BLOCK, host:

In a world still coping with bubbles and financial crises, here's a new worry: Dubai. Financial markets in Europe, Asia and here in the U.S. have swooned in recent days. They're afraid that Dubai, one of the United Arab Emirates, might default on its debt. And if that happened, the fortunes of an up-and-coming economy could collapse because of investments made during a bubble.

Adam Davidson is part of NPR's Planet Money team. He joins us to explain it. Adam, tell us, please, the latest in the Dubai debt crisis.

ADAM DAVIDSON: Well, today was the day everyone was waiting for. Last week, Wednesday, Dubai World, this private investment company wholly owned by the government of Dubai announced, hey, we can't pay the money we owe to our bond holders. They have something like $60 billion in debt held by investors all over the world. And they said, we can't pay. You need to give us a few extra months. That is a big, big deal in the world of finance.

And since it was owned by the government of Dubai, the rest of the world was saying, hey, is the government going to come in and help them out? We learned in the last 24 hours, no, the government is not going to help them out, that this is a private company and even though we own it, we're not going to bail them out. So, markets in the Arab world really, really collapsed today as people realized, boy, this government-owned company is going to default on its debt.

BLOCK: Sort of confusing, Adam. This could be a wholly-owned company by the government of Dubai, yet, they're not guaranteeing its debt. How does that work?

DAVIDSON: So, first up, what is an Emirate? An Emirate is little bit less than a country, but a little bit more than a state. The United Arab Emirates is this alliance of seven emirates, who largely run their own economies, but join together on foreign policy, military issues, things like that. So the government of Dubai, led by Mohammed Al-Maktoum, said that we created this as a private company to signal to the market that it will live and die on its own. You are on your own, it said to the investors in Dubai World.

BLOCK: How did Dubai become this central node in the global economy?

DAVIDSON: It is an amazing story. Dubai is tiny. It's really more a city than a nation. There are only something like 100,000 native Dubaians. But, basically, the leader of Dubai, Mohammed Al-Maktoum, realized that Dubai was running out of oil and that if they were going to continue to live a prosperous lifestyle into the future, he needed to find other things to invest in. He decided we're going to become the new Lebanon.

Lebanon used to be the business financial center of the Middle East, the civil war destroyed that. And Dubai invested billions in making that happen for Dubai. They also invested billions all over the world: the MGM Grand casino, $5 billion, the largest homebuilder in the U.S. All these businesses that we now realize they invested at the top of the bubble of the subprime housing bubble. That bubble burst, costing Dubai billions of dollars.

BLOCK: If you think about it globally, Adam, how much might Dubai's troubles then ripple out through the rest of the world?

DAVIDSON: So, over the weekend and last week, the panic - and it was a real panic - was that Dubai defaulting on its debt would make investors all over the world start worrying about other countries: Hungary, Brazil, Asian economies and thinking, are they are going to do what Dubai did? And that investors might - and this has happened in the past, it happened in �97,�98 - investors might have a panic retrenchment. They might pull their money out of these countries and actually precipitate the crisis they were afraid of. That's what people thought might happen.

Today, the story that the financial markets and the financial press are telling is, no, we dodged that bullet. Although I will tell you, I remember one day after Lehman Brothers, people were saying we dodged the bullet. There won't be financial collapse and of course later that week there was. So it is still a scary time, although calmer than yesterday.

BLOCK: Adam Davidson of NPR's Planet Money team. Thanks so much.

DAVIDSON: Thank you, Melissa.

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