Dubai - Another High Flyer Grounded

Several years ago Dubai was the land of milk and honey. Its economy was booming and it was lauded as the next big global financial center. Now, it's sovereign wealth fund is teetering on the edge of default and its real estate has dropped 50% in value. Once again, the old adage is proven correct: the higher up something goes, the further it has to fall.

The press is covering Dubai's econonomic problems:

• Dubai Crisis May End in Major Default (Bloomberg)
• Dubai Fallout Hurts Stocks (WSJ)
• Dubai Debt Troubles Push Down Stocks in US and Asia (NY Times)

I had a cousin who took several business trips to Dubai in 2007. He described a country where wealth literally flowed from the fountains that lined the desert city. He said the malls were packed with luxury goods, the shoppers bought like there was no tomorrow, the roads were filled with luxury cars, and everywhere there was the smell of money. Well, we now know that much of that occurred because of a massive borrowing boom - $80 billion to be exact - that was unsustainable and couldn't be paid back. Dubai looks like the Middle Eastern equivalent of Iceland and Ireland. Countries that soared high on debt spending and a wave of credit and have now crashed back to earth.

Dubai will most likely emerge from its problems okay but with a little less sovereignty. My guess is that oil rich Abu-Dhabi will come to its rescue. It will also take even more of the lustre off a region that was poised to become a global leader. Of course, that been true of many Western financial capitals - New York, London, etc. - so maybe Dubai's decline should be seen as relative. It's not doing any worse than its financial peers across the Globe.

The impact on markets will most likely be brief. UK banks (RBS and HSBC) have the biggest exposure to Dubai and my guess is their losses will be minimal. Still Dubai's problems are a reminder that in a global slowdown, pressure remains on all debtors. At anytime, markets can receive word that a major borrower is in trouble.