A Danger in Dubai

Debt and lack of transparency in the affairs of the emirate have shaken investors’ confidence. It is important that the Gulf states continue on the path of free markets

There will be a trace of schadenfreude in Western financial capitals about Dubai’s financial woes this week. During the economic downturn, it has been easy for businesses in the Gulf, buoyed by petrodollars, to buy Western assets cheaply. Sovereign wealth funds have in effect acted as private banks, with minimal disclosure, for the oil-rich to go on a corporate shopping spree in Europe and the US.

But any mild satisfaction at Dubai’s misfortune would be seriously misplaced. Amid the financial market ructions, one message should be stressed by policymakers: it is important that Dubai succeed. The liberal economic order of open markets and free trade is the most effective means of repairing the economic damage wreaked by awesome financial mismanagement.

The world was alerted to Dubai’s problems by a brief statement about the corporate restructuring of Dubai World. It sparked convulsion on world stock markets. The state-owned company, one of the biggest in the United Arab Emirates, is having difficulty in repaying $60 billion in debt. The story is bigger than Dubai. In 2007-08 the Western financial system all but collapsed under a cascade of bad debts. Investors are apprehensive that the debt problems of Dubai and the exposure of Western banks might mark a new stage in the global financial crisis.

After the collapse of Lehman Brothers in September last year, when a credit squeeze turned to a full-blown financial panic, policymakers responded swiftly. They bailed out the banks, slashed interest rates and launched huge public spending programmes. Stock markets stabilised in March and have since recovered strongly. Investors have bet that the risk of economic catastrophe has receded and that the banks are now secure. They must now ask whether the signs of recovery were a false dawn... Read the whole article.