Dubai's Debt Troubles Ripple Worldwide

Dubai World is talking to some of its creditors about restructuring its debt. The huge government-controlled holding company in the Persian Gulf last week stunned the financial markets by announcing that it was having trouble paying off an estimated $60 billion in debt. Dubai World's troubles still pose risks to the world economy.

RENEE MONTAGNE, host:

This is MORNING EDITION from NPR News. I'm Renee Montagne.

STEVE INSKEEP, host:

And I'm Steve Inskeep. Some people may have missed this story over the holiday. The troubles of one company in the United Arab Emirates sent world markets tumbling. It is a very large company, Dubai World, the government-controlled holding company in the emirate of Dubai, which says it's having trouble paying off $60 billion in debt.

Stock markets calmed down yesterday, but as NPR's Jim Zarroli reports, Dubai World's troubles still pose risks to the world economy.

JIM ZARROLI: When the U.S. banking crisis erupted last year, a lot of wealthy investors in the oil-rich Persian Gulf took a hit. For example, Abu Dhabi's huge sovereign wealth fund was a big investor in Citigroup. And Jim Rickards of the consulting firm Omnis Group says it watched its investment plummet in value.

Mr. JIM RICKARDS (Senior Managing Director for Market Intelligence, Omnis Group): This is early 2008, so they sort of said, you know, to heck with Wall Street, to heck with, you know, you Western capital markets. We'll invest locally.

ZARROLI: And, Rickards says, a lot of Gulf investors put their money in Dubai. The tiny emirate had little oil of its own, but had made up for it by blossoming into a tourist haven and financial center. For these investors, the sudden collapse of Dubai World has been a painful surprise. Rickards says as recently as a few days ago, the company's bonds were selling for a lot of money.

Mr. RICKARDS: Meaning people were willing to pay more than the amount you were going to get back just because they thought the interest rate was attractive. So there was really no inkling that this was going to happen. It really did come as a shock.

ZARROLI: The fact that Dubai World went public with its troubles puzzles Mohsin Khan, who used to direct the Middle East program at the International Monetary Fund. Khan says there's a lot of money sloshing around the Persian Gulf, and Dubai World could probably have negotiated a deal much more quietly.

Mr. MOHSIN KHAN (Former Director, Middle East Program, International Monetary Fund): Dubai raised $5 billion a week ago through Abu Dhabi banks, so why announce the standstill now? I mean, that's the question that is bothering people.

ZARROLI: Like a lot of people, Khan sees what's happened lately as a kind of brinksmanship between Dubai, which controls the company, and its wealth neighbor Abu Dhabi. Khan says investors have always assumed that Abu Dhabi would prop up Dubai World if it ever got in trouble, even if it never said so explicitly. Khan says by going public, Dubai may have been trying to force Abu Dhabi into a corner.

Mr. KHAN: In some sense, people believe that that was to force Abu Dhabi to come out and say that they would support Dubai.

ZARROLI: If that was the strategy, it wasn't quite worked. Abu Dhabi hasn't stepped forward yet. But Khan says in the end, Abu Dhabi or the Central Bank of the United Arab Emirates will have no choice but to do so. Dubai World is just too important to the economy of the Gulf.

Mr. KHAN: If you're talking about too big to fail, here's a company that is so big, it's roughly 60 to 70 percent of the GDP of the country.

ZARROLI: If it were allowed to fail, Khan says, the carnage would spread throughout the region. Even wealthy, oil-rich countries with huge foreign reserves would be tarnished.

Outside the Gulf, the collapse of Dubai World would be felt most acutely by a few large European banks that invested heavily in the company. U.S. banks have relatively little exposure. But that doesn't mean Dubai World's fate is irrelevant to the United States. Jim Rickards says Dubai World borrowed heavily and invested recklessly. And its troubles have to be seen as part of the fallout from the global credit crisis.

Mr. RICKARDS: I don't really see these events as isolated. I see them almost like dominos falling. We haven't really solved any of the problems. We haven't written off what we need. All the losses have not been occurred. They can be papered over for a period of time, but they can't be eliminated completely. So I would expect more events like this.

ZARROLI: Dubai World wasn't the first company to reveal that it had gotten in over its head. And Rickards says whatever happens to it, it's unlikely to be the last.

Jim Zarroli, NPR News, New York.

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