CHAPTER 79 Dubai: Or Is It Bye-Bye?1
After two difficult years, most come away with the thought that financial markets the world over should have stabilized. Sure, the extraordinary steps taken to stop the panic resulted in flooding the global system with trillions of US dollar liquidity. In all, governments had spent, lent, or guaranteed close to US$12 trillion, and central banks held interest rates to near zero to end the financial crisis. Even so, as to be expected, most of the previous excesses were never quite worked off. They can’t just make all these excesses go away—no thanks to continuing flows of cheap money around the world. So, we should not be surprised to see overleveraged Dubai stumble toward the end of November 2009. Inevitably, it had to cut its debt burden down to size. Around the world, financial markets quivered. Investors—mainly banks—found themselves in a flare-up they feared would happen, but had hoped would not.
Dubai’s Caustic Lesson
The problems of Dubai are already well known. A property play that turned into a bubble that burst. The boom was fueled by easy credit, a poorly regulated market overrun by speculators, and cheered on by a go-go Dubai during the heyday of the prefinancial crisis. Since then, residential real estate prices have slumped by nearly 50 percent. Across the United Arab Emirates (UAE), it has been reported that some US$450 billion of construction work had been scrapped. It all culminated in the recent announcement by Dubai World, ...