Dubai’s Financial Sandstorm, Tip of Iceberg?
The news of rescheduling of interest payments on US $ 28 billion debt of Dubai World & Nakheen group came as a shock to the still fledgling global economy. Just when green shoots were claimed to be visible and feel of recession getting over in few countries was being talked about, the news from the unexpected quarters rattled the world for a day or two. As the details came out and bail out plans from Abu Dhabi reassured the global investors, the dust settled down. But this gave a stark reminder to the economists and financial institutions of the vulnerability of such shock waves. Has the world taken a lesson from the global melt down of 2008 starting with Lehman Brothers and its fall out? At least in some aspects it seems there is a scope for picking up threads and putting an early warning system for potential triggers for financial catastrophes waiting to happen. It is obvious that the UAE government, Dubai World & Nakheen all were in the knowledge of the potential defaults and need to restructure their portfolios. They were on the brink of collapse and must have been trying hard to avoid a repayment default. Obviously it was kept under the wraps to void any unwarranted impact of financial markets and credibility of the economic driver in the Middle East. Now the UAE government has distanced itself from the Dubai World crisis. This disassociation hints at disowning any potential crisis in other government run companies. This helped a “stable” rating by Moody’s for UAE & Abu Dhabi governments. S&P have downgraded credit rating of Dubai World related government companies to junk status. It is sad & unprecedented that when these companies borrowed the funds in billions of dollars, they were perceived to be government backed companies and now that they have been “disowned” by the government, they are reduced to junk status. What was the basis for granting huge loans without adequate security or sovereign guarantee? In a country with national debt of $ 100 billion, only two entities accounted for 80% debt. How can the government distance itself from such huge commitments? If the loan repayments on debts of billions of dollars were not guaranteed by the government of UAE, then it is the case of over leveraging the mere