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DuBubble DuBurst
You know about Dubai's economic crisis. But do you know the background to - and fallout from - the crisis?
A Brief History
Historically, Dubai had an oil-based economy.
But
because Dubai's oil reserves were declining, the government - led by
Sheikh Muhammed Al Maktoum - decided to diversify into other areas,
especially tourism and commerce. See this and this.
That's why Dubai built the world's only 7 star hotel, a series of luxury islands, and the world's largest tower.
But the global property bubble is bursting.
As I wrote last December:
Housing bubbles are now bursting in China, France, Spain, Ireland, the United Kingdom, Eastern Europe, and many other regions.
And the bubble in commercial real estate is also bursting world-wide. See this.
But Dubai got hit the hardest.
As Bloomberg notes:
Dubai
suffered the world’s steepest property slump in the global recession,
with home prices dropping 50 percent from their 2008 peak, according to
Deutsche Bank AG.
As the CBC notes, things went South quickly in Dubai:
Hundreds of billions of dollars worth of building projects were delayed or cancelled. Thousands of jobs disappeared.
Dubai,
playground of the über-extravagant, suddenly found itself facing the
very real possibility that its biggest state-owned company, Dubai
World, could go into bankruptcy. It warned it was having trouble making
debt payments on $59 billion US — money borrowed to pay for all the
excess.
Global Impact
The CBC also notes that Dubai World has holdings worldwide:
Dubai World is Dubai's main holding and investment enterprise, but its holdings range far beyond the Persian Gulf area ...
Another
Dubai World holding — DP World — operates Centerm, a container terminal
in Vancouver's inner harbour. DP World acquired the terminal when it
bought the marine terminal assets of P&O Ports in 2006, and plans
to spend $140 million to expand it.
That purchase also gave it
ownership of many key U.S. ports — something that raised national
security concerns in the U.S. Some American legislators didn't like the
idea that U.S. ports would be controlled by Middle Eastern state-owned
enterprises. DP World subsequently sold its U.S. port assets.
In
Britain, another Dubai World subsidiary, Leisurecorp, bought the
Turnberry Resort in Scotland in 2008 — home to the 2009 British Open —
for more than 50 million pounds.
In the U.S., Dubai World's
investment arm, Istithmar World, bought the luxury retailer Barneys New
York in 2007 for almost $1 billion US. There were reports earlier this
year it was trying to unload the retailer as the luxury market unwound
and Istithmar racked up big losses from the global financial meltdown,
but Dubai World's chair denied it.
In addition, Bloomberg notes that India might be effected by Dubai's economic problems:
About
4.5 million Indians live and work in the Gulf region and remit more
than $10 billion annually, according to government data. The turmoil
may affect remittances, said Thomas Issac, finance minister of the
southern state of Kerala, which accounted for about a quarter India’s
migrant labor in 2005...Remittances from the Middle East account for about 25 percent of Kerala’s economy, Issac said
The Royal Bank of Scotland
is Dubai's biggest creditor, with $2.3 billion, or 17 percent, of Dubai
World loans since January 2007. HSBC, Europe’s biggest bank, has the
“largest absolute exposure” in the U.A.E. with $17 billion of loans in
2008
Yves Smith notes that Dubai's default caught creditors by surprise:
I
got a message from someone who was on the conference call [with Dubai
government officials]... Some European banks may be on the wrong side
of this trade. As readers may know, EuroBanks went into the crisis with
even lower capital levels than their US counterparts, and have taken
fewer writedowns of their dodgy exposures:The
standstill announcement…was a massive surprise. One could sense the
panic in those asking questions….this could be the turning point in
spreads and could be viewed similar to the Russian debt crisis in 1998
or the Bear situation in 2007…based on companies and the accents of the
people asking questions, it is obvious European institutions will be
hit hard…Dubai made this announcement at the beginning of a four day
holiday, so there will be little news until next week…There is another
wave of pain out there. This information does not seem to be making its
way to other markets. It will.
Zero Hedge has a good roundup of statistics regarding the biggest creditors of the United Arab Emirates, of which Dubai is a part:
Creditors:
Of United Arab Emirates (By Origin via Credit Suisse citing Bank for International Settlements):
United Kingdom: $50.2 billion
France: $11.3 billion
Germany: $10.6 billion
United States: $10.6 billion
Japan: $ 9.0 billion
Switzerland: $ 4.6 billion
Netherlands: $ 4.5 billion
Of United Arab Emirates (By Entity via Credit Suisse, citing Emirates Bank Association):
HSBC Bank Middle East Limited: $17.0 billion
Standard Chartered Bank: $ 7.8 billion
Barlays Bank Plc: $ 3.6 billion
ABN-Amro (RBS): $ 2.1 billion
Arab Bank Plc: $ 2.1 billion
Citibank: $ 1.9 billion
Bank of Baroda: $ 1.8 billion
Bank Saderat Iran: $ 1.7 billion
BNP Parabas: $ 1.7 billion
Lloyds: $ 1.6 billion
The Associated Press has additional details.
Bloomberg notes that Dubai's default might increase risk aversion of investors to emerging markets:
“We’re
bound to see a rise in risk aversion,” Arnab Das, the London-based head
of market research and strategy at Roubini Global Economics said in an
interview. “The Dubai situation signifies that although the major
central banks around the world have stabilized the financial system,
they can’t make all the excesses simply disappear.”
India’s
stocks, currency and bonds fell on concern investors may shy away from
riskier emerging market assets over losses stemming from the turmoil in
Dubai. India’s benchmark stock index dropped 1.3 percent yesterday,
while the rupee lost 0.5 percent.
Zero hedge also notes:
- UBS
speculates that (among other possibilities) $80-90 billion (which is
already over 100% of GDP) may be a low figure for Dubai's debt and that
significant "off-balance sheet" amounts might explain the restructuring
attempt - The Dubai government is on holiday (Eid Al-Adha) until December 6th
- Abu
Dhabi's Sovereign Wealth Fund (generally thought to command upwards of
$500 billion) may have significantly less available. (Rumors of $125 billion in 2008 losses
abounded last year). Bloomberg quotes sources to the effect that Abu
Dhabi SWF's AUM has been "overstated, sometimes by as much as 100
percent."
British prime minister Gordon Brown has indicated how serious the situation is:
"Clearly
the restructuring announcement has caused disruption and uncertainty in
world markets,” Brown’s spokeswoman Vickie Sheriff told reporters in
London. Brown’s “view is that U.K. banks are well capitalized having
undergone rigorous stress testing,” she said.
And the Associated Press is asking whether Dubai's default will cause another financial panic.
The numbers involved are not that great for most creditors - on the order of hundreds of millions of dollars.
But
the sense of shock and loss of confidence - when many had
optimistically believed that the world economy was out of the woods -
could indeed be profound.
Dubai is a well planned and masterfully crafted scam to lure the world's wealthiest to invest into oblivion and nothingness. Was so surprised with the gullibility and stupidity of these well offs in believing that a castle made of sand is there to last forever. A ski resort on a desert?... Haven't they heard of the word sustainability?
Despite there being no evidence to hand - yet - for the Dubai default being worse than the headline debt numbers indicate, to think that the big dumb money poured into Dubai by global banks came without a farrago of off-balance sheet "innovative products" is kind of far-fetched. I'll bet the full story will be about the derivatives behind the curtain and the inability to disentangle them from the assets thereby preventing any kind of timely workout. But we shall see.
The guy at UBS who claimed that this Dubai default could be worse than it appears is being quoted everywhere despite offering absolutely no foundation for those claims.
However, it appear that DW may not have paid up for all the land it used yet. So is there actually any collateral there apart from some shoddily built empty condos?
Long term equity charts have been bearish for some time.
Technical analysis can also assist us as to the direction of the economy.
http://www.zerohedge.com/forum/market-outlook-0
How log before oil prices shoot up to pay for this mess? Of course, a convenient excuse will be concocted to explain away the sudden increase (remember just last year, the chinese demand? Before that, the various US formulations/lack of refining capacity, before that Katrina, etc. etc. etc.)
It's like the worst of the 1930s and the 1970s combined.
Whatever happened to CitiBank investing $8 billion into Dubai with Taxpayer's bailout money? It is definitely more than the stated $1.8 billion.
http://www.7days.ae/storydetails.php?id=75035&title=US+outrage+over+Citi...
US outrage over Citi loan to Dubai
The US public will be “outraged” by Citibank’s $8 billion loan to Dubai just six weeks after the bank was bailed out, US House of Representatives domestic policy subcommittee chair-man has said. Dennis Kucinich commented on the Dubai loan and other US banking investments as a congressional panel released a report that strongly questioned Citibank’s actions. The report, shown to 7DAYS, cites the Dubai loan as the largest of the “questionable transactions” by banks after the US government bailed them out. It notes that the loan to Dubai’s public sector came on December 14, just six weeks after the US government gave Citibank a $25 billion bail-out.
The report quotes Win Bischoof, then chairman of Citi, as saying the bank agreed to the Dubai loan because “we continue to place the Gulf region among our globally most significant markets”. The report also questions JP Morgan’s $1 billion investment in India and Bank of America’s $7 billion investment in China. “When the American people find that their tax dollars, which were supposed to be used to get us out of this financial crisis, are instead being used to ship jobs and investments overseas, there will be outrage,” Kucinich said. The report notes the loans were not illegal and that it is not known if they were directly funded by bail-out funds. A Citibank official was quoted at the time as saying the $8 billion came from the bank’s own funds and third party sources. The report was released as the committee prepares to question banking chiefs about their use of bail-out funds.
Whatever happened to CitiBank investing $8 billion into Dubai with Taxpayer's bailout money? It is definitely more than the stated $1.8 billion.
http://www.7days.ae/storydetails.php?id=75035&title=US+outrage+over+Citi...
US outrage over Citi loan to Dubai
The US public will be “outraged” by Citibank’s $8 billion loan to Dubai just six weeks after the bank was bailed out, US House of Representatives domestic policy subcommittee chair-man has said. Dennis Kucinich commented on the Dubai loan and other US banking investments as a congressional panel released a report that strongly questioned Citibank’s actions. The report, shown to 7DAYS, cites the Dubai loan as the largest of the “questionable transactions” by banks after the US government bailed them out. It notes that the loan to Dubai’s public sector came on December 14, just six weeks after the US government gave Citibank a $25 billion bail-out.
The report quotes Win Bischoof, then chairman of Citi, as saying the bank agreed to the Dubai loan because “we continue to place the Gulf region among our globally most significant markets”. The report also questions JP Morgan’s $1 billion investment in India and Bank of America’s $7 billion investment in China. “When the American people find that their tax dollars, which were supposed to be used to get us out of this financial crisis, are instead being used to ship jobs and investments overseas, there will be outrage,” Kucinich said. The report notes the loans were not illegal and that it is not known if they were directly funded by bail-out funds. A Citibank official was quoted at the time as saying the $8 billion came from the bank’s own funds and third party sources. The report was released as the committee prepares to question banking chiefs about their use of bail-out funds.
http://en.wikipedia.org/wiki/Sukuk
http://www.sbp.org.pk/departments/ibd/sukuk-risks.pdf
I remember how they all said the subprime mortgage crisis was contained in the summer of 2007. Now I bet they'll say the same thing about Dubai over the coming weeks.
I always said the only people who would want to buy a sea front townhome in Dubai are the locals who are used to that kind of heat. How can you cool off diving into sea water that has an average temperture of 84 degrees F?
Real estate prices of 50% off is still way too steep for me (even if I could afford it). Plus I'm gay so they would probably execute me.
"Real estate prices of 50% off is still way too steep for me (even if I could afford it). Plus I'm gay so they would probably execute me."
funny thing about the MSM non reporting of coincidences.
Most countries are having the same problem at the same time.
CBs having any guilt about this? Oh i forgot, its our fault. The conspiracy of the people to defraud the banks by becoming jobless and giving the fed a bad name by sleeping beside the building .
I wish that the wallstreet boys were men.
U.K. Prime Minister Gordon Brown said he and Financial Stability Board Chairman Mario Draghi are confident that Dubai’s debt troubles are “containable.”
Containable?
Where have we heard that before?
Containable? Like in a garbage can?
Take out the papers and the trash
Or you don't get no spendin' cash
Get all that garbage out of sight
Or you don't go out Friday night
Yakety yak (don't talk back)
http://www.youtube.com/watch?v=Wf7seK3n9rE
the epitomy of the adage: spending money they don''t have; for things they don't need; to impress people that (don't) matter.
Absolutely fabulous piece. As a newbie to ZH - your work is stellar. Many thanks for all the energy and effort you put into your research and writing. Well Done!
Makes me wonder what got Tiger so worked up about the other night that he had to go drive his car into a tree.
Makes me wonder what got Tiger so worked-up about the other night that he had to drive his car into a tree?
The real loss would have been if they had completed this stupid real estate speculation, and a lot of rich people had bought into it because it was this year's "thing to do", and sooner or later some natural disaster had befallen it, or people had just gotten tired of flying all the way to Dubai where there's nothing to do, and then you can be sure that we taxpayers would have been hit for the bill to bulldoze the entire stupid thing, all built with gold-plate and already falling apart, instead of just a few stupid manmade islands with not even a tree on them. Stupid stupid stupid.
GW - No matter how hard some folks work to keep the information flow positive the crap will eventually float to the surface. Ultimately, the losses suffered by US, UK & EU institutions will be covered and help provide the fodder for the next round of QE even as the crutches of QE1 continue to be used and abused. I rather suspect that the limits of "full faith and credit" will be explored until that particular sentiment finds its way to where "the war to end all wars" now resides.
Excellent effort.
This is one of the best reports on the Dubai mess out on the internet. Thank you.
Most of the mess seems to have been spun by the MSM into "Do Buy!" for Black Friday.
Dubai = the collapse of a monstrously expensive, but poorly thought out relic of the 2003-2007 commercial real estate boom that has nowhere to go but to revert to its natural state of being a thinly inhabited desert, with half-built towers serving as a monument to oil-fueled hubris. A lot of money - particularly that which assumed Arab oil money "implicitly" guaranteed all this debt - will go "poof" over this one.
Hey, anyone figure out the derivative implosion
amount yet?2
This is an excellent piece and thanks for the information!
Dubai a nonsurprise surprise and so many get worked up. Get away from the peephole and try to see the bigger picture. We may have already turned but the experts like generals keep fighting the last war. Only white swans ahead.
Everyone saw this coming. Here's an article from the nytimes back in February. The banks around the world are now trying to spin this into a crises that caught them by surprise. Oh dear, the entire system will go down -- the banks need help; print money!!! puleeze.
http://www.nytimes.com/2009/02/12/world/middleeast/12dubai.html
Good work, GW. This world has no shortage of ignorance, arrogance and greed---and thus, when you reap what you sow---you should not be suprised. I urge believers to re-aquaint themselves with the Holy Bible. Less frustration there.
As I already said it 2 years ago with european real estate.
you get a 4.2% return on investments and you get with that the risk of nonpaying renters who are protected by law so you can't throw them out for one year.
the only reason why people invested in real estate was because the values went up.
Even if the market would stabelize, there is no more reason to invest in real estate, thus the values will go down, till the returns get back arround the 10% area. And as rents are also dropping, that could mean the prices for old buildings could drop another 75% in Europe.
Brown's spokeswoman Vickie Sheriff... "U.K. banks are well capitalized having undergone rigorous stress testing."
After i stopped laughing (literally, took a minute or two) we must all remember that some UK banks are nationalized, and as such literally owned by the country/tax slaves. If anyone actually believes the line by Vickie they should immediately be buying land at top price in Dubai and may as well trust Turbo Timmy to do their tax return for good measure.
The worldwide central banksters, Ponzi schemes (social security, etc) and retail arms of the US Federal Reserve (JPM, GS, etc) are running amok. It makes perfect sense why central banks are net buyers of gold and why the price is rising in general. This entire mess would end suddenly so one has better be prepared. As those pesky buggers say "Got gold?", occasionally even the hatters get it right.
Brown's spokeswoman Vickie Sheriff... "U.K. banks are well capitalized having undergone rigorous stress testing."
The Royal Bank of Scotland is so well capitalized that a week ago it needed a guarantee from the U.K. government to raise $7 billion in new debt.
Brown's spokeswoman Vickie Sheriff... "U.K. banks are well capitalized having undergone rigorous stress testing."
I laughed my ass off as well. These government people will say absolutely ANYTHING, no matter how outrageously stupid and untrue.
All I could think of is Tim Geithner doing the same thing "our banks our very strong because of the stress tests" and the line that will clearly define his history " i believe in a strong dollar".....
Great piece ! Thanks for sharing it with us GW.
And good catch on the Bloomberg piece about furriners working in the region. Though Saudi is the central destination for migrant workers ... as a % of the national work force itself, I'd be willing to guess five bucks and a milkshake that the metric for Dubai would be extremely high.
Foreign workers constitute about 80% of Dubai's working population.
Anyone remember how big LTCM's default was?
4.8 billion
allah ahkbar
Allahu akbar
because there is no connection between world employment and production levels and economic health, therefore we can be 'out of the woods' even as the entire world production and employment decline makes 1929 look just peachy.
RIiiiiIIIiiiIIIIiiiIIIIIIIIIiiiiiiiight.
excellent point Anon !
most lazy anal-ysts fail to address the proper analogue here, which is 1930's employment/ GDP etc., etc. from the US with today's GLOBAL metrics and NOT the US alone.
and to the french guy below, delacroix ... personal opinion aside ya just can't toss around the Takbir and misquote it, especially when your handle is "of the cross." cmon chuck-frank, after Theo van Gogh you know that ish ain't kosher.
Off on a holiday honoring Abraham's "sacrifice" of his son.
--off until December 6th.
Hey what could possibly happen in the meantime?
Defaulting while "on holiday". I like their syle. Let the banks worry about it.
Dubai: allow me to introduce you to "malinvestment".
Enjoy.
Thanks GW; nice history and concise executive summary of the situation.
Price/Rent, select bubbles,
http://1.bp.blogspot.com/_Et4TQ-a0gGU/Sg7WE-vBCII/AAAAAAAACEM/FQKqA_G5XO...
The stupid governments of the world and the Satanic Federal Reserve and their associates can't stop the Deflation Spiral from exacting its toll. Once a deflationary spiral starts you can't stop it. Defaults start cascading into more defaults. Assets, money and debt are being destroyed at a rapid pace. The criminals, led by the Devil's Spawn Bernanke, are trying to hide it but it's out there. Dubai's default will spread. Then Ireland, the Baltics, the big banks etc. The criminal syndicate will keep trying to fight it but they'll fail. They'll end up bankrupting the country trying to protect their masters.
+100
Two years from now Bernanke will finally be caught by the authorities, hiding in the NYC subway system, along with the bums and the rats.
America's Most Wanted (AMW) press release: "Tonight America's Most Wanted features the hunt for Ben "the bag man" Bernanke, the financier and money man for the Wall Street crime families and the world's biggest banksters.
Tonight we need your help. Interpol warns that Ben and henchman Timmy "the GS puppet" may be slipping into Dubai or London this weekend to plot another robbery of the world's taxpayers.
Ben and Timmy the toothless are front men for a notorious gang of international money launderers, counterfeiters, loan sharks, Ponzi princes, short changers, three-card Monte operators, turnstile jumpers, pension robbers, widow rapers, and house-of-cards skyscraper builders.
We ask our viewers in Dubai and in London to be on the look-out for Ben and Timmy. Intelligence reports indicate Ben plans to show Dubai how to extort the world governments to pay billions of dollars to Ben and Timmy's banksters or face the destruction of the world financial system and economy.
Ben can easily slip thru security check points with his many disguises (including his highly effective squirrel disguise). Timmy is easily recognized as a sock puppet with a GS logo.
We really need your help. All it takes is a phone call, and I promise you can remain anonymous."
+10
And after that we will throw them in the PMITASS prison!
Pound Me In The A$$ Prison!