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The government in Dubai has confirmed that it will not guarantee the debt of the state-controled investment company, Dubai World. This has led to sharp falls on the Dubai and Abu Dhabi stock markets. But the problems in Dubai and Abu Dhabi could have long-term repercussions in parts of Europe and the developing world. The World’s Jason Margolis has more.
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MARCO WERMAN: I’m Marco Werman, and this is The World, a co-production of the BBC World Service, PRI and WGBH Boston. The Persian Gulf emirate of Dubai today tried to reassure investors about the health of its finances, but investors didn’t buy it. Stock markets in both Dubai and neighboring Abu Dhabi fell sharply today. The problem, as investors see it, is Dubai World. That’s the main investment arm of the government of Dubai. It’s having trouble repaying billions of dollars of debt, and the emirate’s government has announced that it won’t guarantee repayment of that debt, which, no surprise, makes investors nervous. The World’s Jason Margolis explains the global implications of this Dubai mess.
JASON MARGOLIS: In terms of major world companies, Dubai World isn’t that big a deal. When General Motors filed for bankruptcy this year, GM’s debt was nearly three times larger than Dubai World’s. But Dubai World is different from GM. The emirate of Dubai owns Dubai World. So, if Dubai World, or by extension, the emirate of Dubai, can’t meet its debt obligations, that spells wider troubles, says Christopher Davidson, a Dubai credit expert from Durham University.
CHRISTOPHER DAVIDSON: Dubai’s disaster, as it unfolds, is certainly tarnishing the rest of the region. The rest of the region by reputation will find it difficult to refinance debt too because the cost of insuring that debt increases drastically.
MARGOLIS: Davidson says banks might also think twice before loaning money to emerging economies in other parts of the world.
DAVIDSON: Dubai has tarnished the reputations of emerging markets around the world, especially Asia.
MARGOLIS: Not that there’s anything new happening in Asian markets. In fact, Dubai’s excess could also potentially tarnish other nations that have even less to do with the emirate.
DESMOND LACHMAN: A bunch of countries like Latvia, Lithuania, Estonia, together with Ukraine, and Bulgaria, and Hungary.
MARGOLIS: That’s economist Desmond Lachman at the American Enterprise Institute in Washington. And Lachman says it’s not only emerging economies that might have trouble getting access to credit.
LACHMAN: If Dubai is reminding people there’s a lot of risk outstanding and if people begin to become a lot more risk averse, lenders become wary about lending to a country that has got very large imbalances.
MARGOLIS: Lachman says some western European countries like Greece, Ireland, Spain and Portugal could have trouble getting loans at reasonable rates. The problems in Dubai pose another kind of risk to the world economy, to the world’s stock markets. Banks in the United Kingdom are the most exposed with an estimated $50 billion in outstanding loans to the United Arab Emirates. American, French, and German banks are all on the hook for about $10 billion each. These loans sent investors scrambling this week, dumping shares, guessing which western banks are most exposed to risk. Right now, and this might be sounding familiar, nobody is certain which banks are holding which bad loans. But maybe it’s not all that bad. Of course, markets often overreact.
DOUG REDIKER: There’s the reality, then there’s the perception of the reality.
MARGOLIS: Doug Rediker is a former investment banker and is now with the Washington think tank the New America Foundation.
REDIKER: The reality there’s a problem in Dubai, there’s a problem in a specific area of Dubai. Not area geographically, I mean Dubai World and Dubai World’s holdings, but that doesn’t necessarily mean that there are problems throughout emerging markets or throughout the Gulf.
MARGOLIS: But then there’s the perception of the reality.
REDIKER: From a snapshot of a trading floor mentality, if you see “Dubai Crisis” on your screen, you could, without having a greater understanding of the nuance, assume that this a broader crisis, sell your positions in a panic and as result trigger something that really isn’t warranted.
MARGOLIS: Warranted or not, that’s what we saw investors do last week. Whether their perception of reality changes this week, that’s another story. For the World, I’m Jason Margolis
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