Is Dubai about to hang itself?

Dubai Debt Crisis

After six years of intense growth, the Dubai economy is finally showing signs of collapsing under the strain.

One of the emirate's largest investment companies, state-owned Dubai World, has asked for a delay on repaying its US$60 billion debt until at least May. The company's real estate arm, Nakheel - whose projects include the palm-shaped islands in the Gulf - shoulders the bulk of money due to banks, investment houses and outside development contractors.

This has added to fears among investors that have existed for some time since the recession hit, over the financial health of Dubai. But it gets even worse.

All together, the state-backed networks nicknamed Dubai Inc. are a bewildering US$80 billion in the red and its oil-rich neighbour Abu Dhabi has even opted to let its fellow emirate hang this time after bailing Dubai out earlier this year.

Shares plunged, weak currencies were battered

Dubai's thrashing in deep water has sent ripples across the globe as shares plunged, weak currencies were battered and more than US$22 billion was wiped from the value of British banks alone on fears that they would be left nursing new losses.

Other international banks are still assessing the implications of Dubai's situation, as lenders of the loans seek more information after the Dubai government's request for a debt standstill on Wednesday as it restructures Dubai World.

The full extent of the fall out will be difficult to gauge until next week after Wall Street closed for the Thanksgiving holiday and most markets in the Middle East were silent because of a major Islamic feast.

"Dubai's standstill announcement ... was vague and it remains difficult to discern whether the call for a standstill will be voluntary," said a statement from the Eurasia Group, a Washington-based research group that assesses political and financial risk for foreign investors interested in Dubai.

Dubai became the Middle East's biggest victim

"If it is not, Dubai World will be going into default and that will have more serious negative repercussions for Dubai's sovereign debt, Dubai World and market confidence in the UAE in general," the statement added.

When the recession reached the Middle East a year ago, Dubai quickly became the Middle East's biggest victim despite ruler Sheik Mohammed bin Rashid Al-Maktoum continually dismissing concerns over the city-state's liquidity and claims it overreached during the good times.

The city where a staggering 30 percent of construction cranes on the planet were located only last year, finally admitted defeat at the hands of the credit crunch early this year when the government showed signs of trying to deal with the financial fallout that has halted dozens of projects and led to an exodus of expatriate workers.

Unclear as to whether they will intervene

Despite the world's tallest skyscraper - the 2600-foot Burj Dubai - scheduled to open in January, many other projects, including a tower even taller than the Burj Dubai and satellite cities in the desert, are still just blueprints. Elsewhere the already world famous developments, the Palm Trilogy and The World, remain under threat from investors pulling out.

Last week, in a desperate move Sheik Mohammed demoted several prominent members of Dubai's corporate elite and replaced them with members of the ruling family, including his two sons, one of whom is Mohammed's designated heir.

Sheik Mohammed is surrounding himself with people he knows and trusts as he goes about rearranging the deckchairs on his Titanic, because although Abu Dhabi still has the strongest incentives to save Dubai from financial misery, it remains unclear whether they will intervene.

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