Dubai World in A World Of Hurt

Dubai World, owned by the Dubai government has requested a delay in payment of around $35 billion of debt. This comes as no great surprise to us, as we have been discussing the eminent collapse of Dubai for some time now. but appears to have been a shock to the currency markets and banks, which is odd considering CitiBank loaned $8 billion of tax payer money to Dubai in December 2008, shortly after a bailout, and the Abu Dhabi government was forced to loan Dubai $10 billion back in February of this year, buying half of a $20 billion bond issue.

According to the government figures at that time. Dubai’s sovereign debt stood at just $10 billion, and another $70 billion owed by state owned companies. So – these figures are not adding up at all. With a likely default of $35 billion just with Dubai World, which canceled it’s flagship project, “The World Dubai,” in September, the actual debts must be astronomical. But – Dubai is not exactly transparent in it’s dealings, and Dubai World alone is estimated to have around $60 billion in debts now. With Dubai’s Gross Domestic Product at less than $54 billion p.a., it does not take a mathematical genius to put Dubai’s debt at anywhere from 200% of GDP upwards.

A lot of small investors and businesses have lost a lot of money in Dubai’s luxury property market, and the British Business Secretary, Lord Mandelson flew out to the UAE back in April to discuss unpaid debts to British contractors in both Dubai and Abu Dhabi. None of which have been resolved – with contractors offered 40 cents on the dollar – if they were lucky.

Quite where this latest announcement leaves us is a mystery and the laws surrounding Islamic bonds seem to be “flexible,” after all, as one of Dubai World’s “subsidiaries,” Nakheel, which blew an estimated $100 million buying the Queen Elizabeth II and then canceled plans to turn her into a floating brothel luxury hotel, has a near $4 billion Islamic bond payment due December 14th.

I say “subsidiaries,” but – all these property and investment vehicles are government owned and controlled, and credit rating agencies have been cutting ratings left right and center – since this morning. In fact, Dubai’s credit quality rating is now lower than that of Iceland.

Once again – it is hard to pinpoint exactly why this has come as such a shock to the financial markets and I would have to point the finger at “willful obfuscation,” on behalf of the governments, banks and media, and the probable losses make Bernie Madoff’s scheme look like the penny ante game it was.