Q. Where did Dubai go wrong? I thought it was in the “oil-rich Gulf”?

A. Dubai is part of the United Arab Emirates, seven city-states which have separate ruling families, separate budgets, but security, immigration and foreign policies in common. Abu Dhabi has nearly all the UAE’s oil. To keep up, from the 1950s Dubai diversified its economy into ports, trade, services and finance, largely successfully. But its liquidity-fuelled real estate and tourism binge of the past decade may have been one step too far.

Q. What is the extent of its problems?

A. The emirate has said it has $80bn (£49bn) of debts, though some analysts say the true figure could be double that. Dubai World, the state-owned holding company whose bail-out plans triggered the current crisis, has liabilities of about $60bn, though only part of that is debt. The main problem is its real estate subsidiary Nakheel, which has huge bonds coming due, including an Islamic bond for $3.5bn in December.

Q. The big market crash after Lehman Brothers folded was more than a year ago. Why has Dubai only just been hit?

A. The property crash hit Dubai at the time – house prices fell 50pc in six months. Nakheel was known to be in trouble. But investors assumed that as a state-owned company it would not default on its debt.

There was a belief that a rescue package was already in place, probably funded by Abu Dhabi. The statement on Wednesday that the government was asking for a six-month standstill on repayments implied the rescue was in doubt.

Q. Why hasn’t Abu Dhabi come to Dubai’s aid? It has the world’s largest sovereign wealth fund.

A. Abu Dhabi has, via the federal central bank, bought one $10bn bond issued by the Dubai government earlier this year, and, via its own banks, bought another $5bn bond this week.

Q. How are other Dubai companies doing?

A. Dubai World owns DP World, the successful ports operator which bought P&O. Other arms of the Dubai government, and the ruling family’s directly owned holding companies, also own successful companies such as Emirates Airlines and Jumeirah Hotels, as well as stakes in buildings and businesses around the world, including the London Stock Exchange. But the emirate’s lack of transparency and relatively untested financial legal system means that no one knows if these can be demanded as collateral against Dubai World and other government debts.

Q. Western banks’ exposure to the debt seems quite small compared to the trillions of dollars to which we have become accustomed. Why the panic?

A. Fears that exposed banks will have to write down losses, and that both Dubai and Abu Dhabi may have to sell worldwide assets, has hit prices everywhere. The disclosure of significant unforeseen problems in Dubai has refocused attention on where else might have hidden “black holes”. The health of sovereign debt worldwide, already seen as the major financial issue for the next decade, is also being re-examined.

Q. Can Dubai survive?

A. Dubai is still seen as the premier place to do business in the Middle East and beyond. But this week’s events have damaged its reputation for economic competence, which the emirate’s rulers will now have to work hard to restore.

Source: Telegraph

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