WashPost
Friday, December 4, 2009
No other country built a ski resort in a desert. No other country constructed an archipelago of 300 artificial islands, complete with a man-made reef colonized by parrot fish. But even if Dubai is a gaudy outlier -- a sort of Donald Trump of a nation -- the bankruptcy of its flagship investment company, Dubai World, holds a warning for others. The nonchalance with which global financial markets have reacted is not reassuring in the least. The lack of alarm is alarming.
Start with the size of the Dubai bankruptcy. Most analysts reckon the emirate will end up defaulting on more than $30 billion. That's up from the $26 billion advertised at Dubai World but perhaps less than half of the city-state's accumulated $80 billion debt. Dubai's bust will be larger than South Korea's 1998 debt restructuring, which involved $22 billion worth of loans, and not much smaller than Russia's default that year (which affected loans worth $40 billion). The South Korean and Russian traumas spread panic around the world. Nowadays, investors yawn at losses that don't run into the hundreds of billions. This is a touch complacent.
Dubai's bust also signals that other leveraged commercial real estate players may be in deep trouble. Dubai World borrowed to buy ventures such as the former Knickerbocker Hotel in Times Square, the Fontainebleau Hotel in Miami and (more shades of Trump) a stake in a Las Vegas casino. Its debts have finally caught up with it. Meanwhile, J.P. Morgan estimates that U.S. commercial real estate prices will keep falling until late next year, raising the risk of more defaults and undermining the collateral that secures a large slice of banks' loan books. The banks will continue to bleed money, curtailing their ability to extend fresh loans to other businesses.
Then there is the broader message in Dubai's bankruptcy: Governments are tired of playing fireman. The past year may have accustomed us to governments rescuing banks, insurers, money-market funds and carmakers, but history is full of crises in which governments were the source of the trouble -- it was they that defaulted. In February, the rulers of next-door Abu Dhabi rescued Dubai with a loan of $10 billion. This time Abu Dhabi refused, so Dubai's government has told lenders not to count on their next payment.
(More here.)
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