[OPE] dubai: capitalism takes the second hit and recession will deepen

From: Jerry Levy <jerry_levy@verizon.net>
Date: Sat Nov 28 2009 - 06:11:07 EST

A couple of articles from another list below.
In solidarity, Jerry


The mirage in Dubai

Dubai was a property dream literally built on sand and borrowed money, where
the rich could enjoy the sun and watch their assets soar in value. But like
so much of recent capitalism, it has proved more mirage than substance.

Dubai World, the emirate’s main holding company, has asked for a six-month
debt holiday from international bond holders because this oil-free state
simply doesn’t have the cash. Result? Turmoil on world stock markets has
returned with a vengeance as investors consider whether Dubai’s virtual
default is the beginning of another round of the global financial crisis.

This is a story about a “boom” based on debt. Sounds familiar? It ought to
because it’s a microcosm of how the consumer boom in the advanced capitalist
countries was financed.

In a bid to emulate its oil-rich neighbours, Dubai borrowed heavily to build
up a non-oil economy based on property, trade and tourism. The total debt is
estimated at $80 billion, although no one knows for sure.

Hotels soared into the sky, luxury homes were built on man-made lagoon
islands and no expense was spared to build a ski slope. The environmental
cost of making snow in Dubai is mind boggling.

Dubai doubled in size and house prices almost quadrupled in 2002-07, since
when property prices have halved. Trade and tourism has suffered because of
the recession and plans for turning Dubai into a regional financial centre
have come to grief in the midst of the global credit crunch.

Today the cranes stand idle as construction projects have ground to a halt.
Skyscrapers are empty and apparently the airport parking lot is full of cars
abandoned by expatriates who have lost their shirts in the property crash.

Graham Turner, of consultancy GFC Economics, said:

'It gives you a picture of the fact that credit problem persists, despite
everything that's been done. Despite having oil, it's still the case that
many of these countries had explosive credit growth. It's very clear that in
2010, we've got plenty more problems in store.'

That’s putting it mildly Graham! The near-collapse of the financial system
in 2008 was only avoided by reducing interest rates to almost zero, printing
vast quantities of electronic money and building up record levels of
government deficits. Far from “restoring growth”, these measures have failed
to prevent unemployment from soaring, especially in the United States. Many
banks, notably in Germany, are still in some difficulties and the
non-performing debt still overhanging the financial system is incalculable.

The amount of new money sloshing around the system has also fuelled a stock
market boom, where share prices have soared by 50%. Andrew Clare, professor
of asset management at Cass Business School, said:

'I just don't understand the basis for the market rally: equity prices had
gone too far. Investors are underpricing all the risks that are out there,
and this is just one of them. Some of those risks are going to come home to
roost, and this is just the first.

And next year they're going to have the shock of realising that interest
rates can go up as well as down; and you've also got places like the UK,
where taxes are going to have to go up and public spending will have to be
cut – and the US, too, has some difficult decisions to make.'

Behind Dubai come countries like Ireland, Ukraine and Greece with sovereign
debt they may not be able to repay. The United Kingdom won’t be far behind
either. Dubai’s is not the only economy built on sand, speculation and other
people’s money.

Paul Feldman
Communications editor
27 November 2009


Reality catches up with the Gulf’s model global city

By Roula Khalaf

Published: November 27 2009 19:57 | Last updated:
November 27 2009 19:57

It was almost a convincing show. The message to the City of London from
Dubai was that the city-state had not only weathered the global economic
crisis but was now destined to benefit as more financial groups escaped the
high tax regimes and mounting regulatory restraints of more established

That was two weeks ago. I was at a conference in London organised by the
Dubai International Financial Centre, which bills itself as one of Dubai’s
great achievements. Of course at the time no one in the room had an inkling
of the storm that was about to be unleashed by the emirate – the demand for
a delay in the debt payments of its flagship Dubai World, a move that sent
jitters through global markets and sparked fears of a setback to the
economic recovery.

Nor did participants know that the man who opened the conference – the
well-respected Omar bin Sulaiman, head of the DIFC – would be sacked a few
days later, without a hint of explanation. But then, this was only the most
dramatic sign of a certain malady in the emirate – an alarming disconnect
between the bubble of Dubai and the real world.

Today the city-
state, which gave us Palm-shaped islands and indoor ski resorts, is a
financial centre that cannot pay its debts. And it has the financial
community – much of it, incidentally, with offices at the DIFC – up in arms,
contending that it had been misled about the city’s debt management

Dubai has always
marketed itself as a model of a global city, in a backward Arab region which
has miserably failed to overcome its conflicts or meet the aspirations of
its young population. The biography of its ambitious ruler – Sheikh Mohammed
bin Rashid al-Maktoum – depicts a man with a mission to usher in no less
than an Arab renaissance.

Yet Dubai has managed its finances with a combination of an autocratic state
refusing to face reality and a secretive family company oblivious to the
expectations and the workings of world markets.

If the global
meltdown washed up on the Dubai shores this week, when other troubled cities
are on their way to recovery, it is, at least in part, because it took the
emirate so long to admit that it was in trouble.

Just over a year ago, when
Lehman Brothers collapsed and world markets tumbled, the word in Dubai was
that the emirate was too strong to be caught up in the turbulence.

In one of many
surreal moments that followed the Lehman debacle, Nakheel, the debt-laden
Dubai World developer at the centre of the storm, unveiled plans to build
the tallest tower in Dubai. A competitor, of course, was already well on its
way to completing the emirate’s tallest building. The new one, though, would
soar above Burj Dubai, said Nakheel.

Officials insisted that Dubai knows how to take advantage of the misfortunes
of others. We live in a violent and unstable environment, they would say,
but that makes us a magnet for people and money fleeing other volatile
spots. This is the Dubai model. This is the Dubai miracle.

In fact, it was probably officials’ fear of admitting to their boss the
extent of the indebtedness of companies under their charge that delayed the

Dubai eventually got over its denial – once it had counted its debts, which
reached a massive $80bn, it was impossible not to. But it was not until
February that it was helped out by Abu Dhabi, through a $10bn Dubai five-
year bond issue to which the central bank of the federation, the United Arab
Emirates, subscribed.

Why so long? Because the proud Sheikh Mohammed, it seems, was reluctant to
be bailed out by his richer neighbour, possibly fearing it would put a
damper on Dubai’s image and constrain its independence. Nor was he willing
to part with some of Dubai’s crown jewels at distressed prices. Some people
suspect that it is the same dogged resistance that has landed Dubai in this
week’s mess.

Even after the February bond issue, officials in the emirate were coming up
with all sorts of explanations for why it should not be defined as a

Though the markets calmed down after the bail-out, it was not long before
more confusion set in. In May one of the main people entrusted with steering
the emirate out of the crisis – and one of the few who recognised the full
scope of the challenge – was demoted.

Nasser al-Sheikh, the director-
general of the finance department, seemed to have been a victim of a power
struggle that intensified this year, as the head of the ruler’s court has
sought to consolidate his own power, at the expense of aides who had been in
favour during the boom years. It was not lost on some observers that while
other competent people were being removed, Sultan bin Sulayem, the head of
Dubai World, had been stripped of many of his powers, but is still at the
helm of the company.

To be fair, Dubai’s plans to restructure its companies and put resources in
the most viable assets might be sound. But given that details of any
strategy are treated like a national secret, and that decision-making is
wrapped up in palace intrigue, the city and now the rest of the world are
left to operate on rumours and speculation rather than facts.

Perhaps none of this
should surprise us. Dubai is a place where investors fell for trick
advertising a few years ago that said the emirate would build a “bubble
city”, a development of restaurants and museums suspended above ground by
helium balloons and surrounded by a transparent enclosure.

This fantasy was never
meant to get off the ground. But maybe it secretly did? And maybe that is
where some of the decision-makers have been living.

The writer is the FT’s Middle
East editor

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Received on Sat Nov 28 06:13:43 2009

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