Posted on 27-11-2009
Filed Under (Current Affairs, Economics, Foreign Policy) by Rashtrakut

The request by Dubai World (the investment flagship for the emirate) for a debt standstill rocked global markets this week.  The latest fallout from the bursting of the real estate bubble brings with it contagion fears and questions about how deep the problems may go.

Dubai World also raises questions regarding “quasi-sovereign debt.”  Investors who previously relied on an “implied sovereign guarantee” for debt issues by these government owned ventures may want a stronger government guarantee in the future.  Government owned entities from South Africa to Russia may find it harder to borrow funds without a risk premium unless their governments explicitly guarantee the debts (relying on the fact that essentially insolvent countries like Iceland have also not stopped paying their debts).

In political terms this also strengthens the position of Abu Dhabi within the United Arab Emirates.  Until the real estate meltdown Dubai was positioning itself as the Hong Kong and Singapore (and with some of the ridiculous buildings coming up, Las Vegas) of the Middle East.  In the process it was upsetting the delicate power balance in the UAE.  With yet another bailout now needed, the more conservative Abu Dhabi will likely extract another pound of flesh to restrain the ambitions and presumptions of Dubai.

If it were needed, Dubai World is just another example of how intertwined the global financial system is and how problems on the other side of the world can have immediate impacts at home.

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