I don’t know what surprised me more about the debacle in Dubai last week, the fact that such a big deal was made or that anyone was surprised it happened.
Dubai World, a Dubai government-backed development group, said they wanted a 6 month pause in paying back a $60 billion loan. This may seem like a lot of money to you and me, but its chump change in the big scheme of things.
The financial crises over the last 2 years tended to be focused on multiple trillions, not billions. Added to this, Dubai is the second largest of 7 United Arab Emirates (UAE), with Abu Dhabi being the largest. Abu Dhabi’s sovereign wealth fund is over $300 billion in size, so bailing out little brother wouldn’t cause it to even break a sweat.
So, what was the big deal that tanked global markets? It simply shows that the credit crisis is not truly over and everyone is still sitting on pins and needles, despite their protests that everything is A-okay.
Credit markets are not healed, and the tremendous bad debt burden has simply been shifted from the private sector to government. The market sold off, in my opinion, because many expect credit problems to happen in the fullness of time and they were worried this was the first of many tremors.
This raises my second point. Why was anyone surprised?
Dubai only gets 6% of their gross domestic product from the petrochemical business. It decided to borrow a ton of money to build islands (shaped like palm trees and the earth), the tallest building in the world, an indoor ski mountain in the desert (I wish I were making this up) and vast ports so that it could become the world’s new Hong Kong. This was Field of Dreams writ large–build it and hope they will come.
Unfortunately, not enough people came.
What a startling surprise! Someone borrows to build a tremendous real estate project only to find there’s no real end demand for it. Sound familiar?
What did surprise me is that anyone didn’t expect this.
Just think what could happen if another entity, say commercial real estate in the U.S., has trouble rolling over debt and doesn’t have a rich big brother to bail them out, or that rich big brother (Uncle Sam) is so saddled with debt he can’t help without going into bankruptcy himself!
We saw what happened when a measly $60 billion defaulted for 6 months, what will happen if a bigger problem arises?
It is for this reason I’m de-risking my clients’ and my portfolios. Things look calm on the surface, but underneath the earth is trembling. Taking risk now may work well for a short time, but not over the long run.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.