Another Domino Falls
The CBC notes that there is plenty of bad economic news to go: Dubai debt woes send world stocks stumbling
For years, Dubai World was at the forefront of Dubai’s international expansion into port operations, hotels and other assets. The slumping real estate markets in many countries combined with the overall economic recession, however, killed the organization’s financials and led to the restructuring.
European and Asian markets are taking a hit because their banks are holding Dubai debt, which was just as leveraged as everything else. Dubai was diversifying because they are running out of oil and didn’t want to revert to their former state of poverty alleviated by smuggling. No reason for them to spend their money when all these bankers were willing to lend them money at very low rates, that got lower every time they refinanced.
So now they are underwater on a lot of their commercial property holdings, i.e. they owe more money than the property is currently worth, and the cash flow has stopped. I don’t doubt that Dubai bonds were rated AAA+.
2 comments
One interesting thing I seem to be picking out of the news is that Dubai structured these deals so shell companies like Dubai World took out the mortgages, not the government itself, so the only option the lenders have is to foreclose on the properties in Dubai courts (snort!). At which point the lenders hold the keys to large empty buildings and vacant lots with half-completed skeletons, *if* Dubai even bothers actually giving them the keys. It makes you wonder WTF these lenders were thinking, because the paper they’re holding explicitly states that the mortgages are *not* backed by the income of the government of Dubai, indeed states no source of income at all for how the loans are going to be repaid. It’s like the whole liar loan fiasco here in the USA, except writ large with international banks!
— Badtux the Amazed Penguin
(but who should not be so amazed by financial institution stupidity by now, I suppose)
I remember reading somewhere that legally the emir owns all of the land in Dubai, and it is leased from him, not bought, so the creditors would own structures, but not the land they are on. It really is a feudal system. Foreclosure could result in being told to remove the structure from the emirate, which would be a bit of a problem. They have bought into multistory trailers without any wheels.
That is the situation for those living on the barrier island South of me on the Gulf, i.e. the land is leased from the county, not owned, so it is not just the emirates that do this sort of thing.
Actually the Dubai government is a sham, because all power rests with the emir and agreements are only in force as long as he feels like it. If you aren’t a member of the emir’s tribe you have no real standing in the emirate. People are stupid to be involved in this kind of situation, and deserve to be conned.