Property booms can do funny things to people’s sense of proportion.  Nowhere is this more apparent than Dubai’s “The World”.  Dredging up sand and rock to create a man made archipelago that looks like the land masses of earth is undoubtedly impressive as engineering feat.  It’s almost all the more impressive for the fact that part of you knows that it’s unjustifiable on environmental, commercial or social grounds.  Something about it is undeniably cool just for it sheer audacity.

Alas it looks like the Dubai property boom has come to an end with many projects half completed and with no real purpose (none more so than a number of interestingly shaped islands).  It is becoming clear that Dubai is having some difficulty in servicing its vast debt.  Even if some agreement is found to restructure this burden appetite for investing in Dubai is unlikely to return.  So a sense of proportion is returning almost like financiers waking up the morning after the night before. “Wow, what a great party, I’ve got this vague memory that a one point we thought spending $14 billion to create some cool shaped islands a great investment.”  The hangover is only just about to kick in.

This leaves us with some questions; who has invested in this project (and Dubai more generally),  for how much and who might step in to bail Dubai out?  Everyone seems to expect a bail out because too many people were involved with this farce but who?  Dubai World, the conglomerate that has driven expansion in the emirate, is reported to have $59 billion in liabilities, almost three quarters of Dubai’s total liabilities of $80 billion.  Standard and Poor have just down graded all six state backed corporations in bond rating, some of them to “junk” status.  Abu Dhabi may step in but haven’t committed to it as yet and if they refuse to all bets are off.  Since the answers to the first two questions are at best unclear a third arises.  What might a default by Dubai mean for global financial markets?

All in all there would be something deliciously ironic if finance for The World brought down finance for the world.  In the meantime keep an eye on Dubai.

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