Why Debt at Dubai World Is Shaking World Financial Markets

As conglomerate Dubai World delays debt payments, most analysts look for Arab Monetary Fund to step in to avert a crisis in financial markets. That’s not likely, though, until Sunday.

New York – How can Dubai, a tiny emirate on the Persian Gulf, shake financial markets from Shanghai to New York?

The answer is familiar to tens of thousands of Americans struggling to make payments on their mortgages or credit cards: too much debt.

On Thursday, Dubai World, a conglomerate, shook world financial markets by asking for a six-month moratorium on paying interest on debt estimated at between $60 billion and $90 billion. Immediately after the announcement, Asian equity markets swooned by 3 percent to 5 percent. The selling continued on the London market, which then recovered in afternoon trading. On Friday, the Dow Jones Industrial Average opened off about 224 points and then started to climb back on a shortened, post-holiday trading day.

The problems in Dubai brought back memories of the near financial collapse that beset the US and Europe after the mortgage meltdown. That collapse led to the worst recession since World War II. On Friday morning, there were indications that some investors had pulled out their meltdown road map: They were buying US Treasury bills in a flight to quality. This drove the US dollar higher and brought down not only the stock market but also the price of gold and oil.

Global analysts expect the Arab Monetary Fund, based in Abu Dhabi, the capital of the United Arab Emirates (of which Dubai is part), to step in. Offices in Abu Dhabi are closed until Sunday because it is the start of the Haij, the annual pilgrimage to Mecca.

“If Abu Dhabi steps in and does what it has to do, the crisis will go past,” says Dennis Gartman, author of the Gartman Letter, a commentary on world economic events. “It has no choice.”

World markets, however, may have to wait for a rescue announcement until Sunday, once office reopen in Abu Dhabi, says Mr. Gartman, considered an authority on global financial issues. But he anticipates some sort of bailout. “These are not silly people, they are very bright,” he says.

The Arab Monetary Fund, though, is likely to ask Dubai World for more restraint, says Gartman. Dubai World has been an aggressive real estate developer, investing in everything from Troon golf courses and the Turnberry golf courses in Scotland. It has interests in the Chris Evert Tennis Centres and the Snowmass resort in Colorado. It also owns P&O Maritime Services, the major Australian-based company that does defense contract work, and Drydocks World, which provides shipping services in places like Singapore as well as the Persian Gulf.

Even after the crisis gets resolved, Mr. Gartman wonders if it will represent a turning point in the equity markets, which have been on a bull run all year.

“This changes psychology a lot,” he says. “What has driven share prices up is not a strong economy but excess liquidity. As share prices went up, people said, ‘I better get in.’ ”

He calls this crisis “reasonably pivotal.” However, he adds there have been plenty of times when what seems like pivotal points in the market proved to be ephemeral. “This one may not be [ephemeral],” he adds.

Indeed, some investors have begun to sound the alarm. David Kotok, chairman of Cumberland Advisors in Vineland, N.J., wrote on Thursday, “The Dubai World debt crisis has contagion risk.”

Even if Dubai is rescued by Abu Dhabi, he added, “insolvency cannot be permanently papered off by excess liquidity, not in the Middle East nor, for that matter, in America.”