Dubai's dream sank in a sea of debt!

The emirate’s debt-fuelled spree has been exposed by the recession. Will UK banks and contractors get back their money?

 

As he flew from Dubai to London last Sunday, Sheikh Mohammed bin Rashid al-Maktoum had plenty on his mind.In the four years since he had become ruler of Dubai, Maktoum had grown used to courting world leaders to visit and invest in his desert emirate. They admired the economic growth he had fostered as Dubai, fast running out of oil, turned itself into a tourism and finance hub.

Maktoum knew that on this trip he would have to strike a more humble tone. After an audience with the Queen at Buckingham Palace, he met Gordon Brown and Lord Mandelson. The damaging effect of the global economic downturn on Dubai’s growth was on the agenda. The sheikh brought reassurances that angry British contractors, caught up in the emirate’s construction collapse, would eventually get paid.

Maktoum also knew that a bigger test to international relations was brewing. But there were few clues until he had jetted out of London.

The crisis struck on Wednesday. On the eve of the Eid religious festival, the Dubai government announced that one of its main investment vehicles, Dubai World, could not pay its bills. Maktoum wanted to suspend repayment of some of its $59 billion (£35.8 billion) debts until May.

Like over-leveraged companies that are being exposed by the recession, Dubai had borrowed beyond its means to fund its building boom. But, as shocked investors saw it, this was a government at risk of bankruptcy, not a corporation.

According to the Bank for International Settlements, British banks had advanced $50 billion to the United Arab Emirates, of which Dubai is one of seven member states. Four lenders — HSBC, Standard Chartered, Barclays and RBS — are the most exposed.

As for the global economy, Gerard Lyons, Standard Chartered’s chief economist, who was in Dubai last week, pointed out: “This is a Dubai-centric problem and it is particularly a Nakheel problem and this, to be frank, has been badly managed.

“The world economy is worth $61 trillion, the Middle East is $1.1 trillion and Dubai is a small fraction of that.”