The Globe And Mail

Dubai’s debt storm
The Globe and Mail

A mounting debt crisis in Dubai, the Gulf emirate whose boundless extravagance came to symbolize the excesses of cheap credit, is rattling investor confidence in emerging markets and raising fears of contagion in the financial sector.

Global stock markets, commodities and emerging market currencies retreated sharply Thursday after state-owned investment conglomerate Dubai World asked for a six-month reprieve on its massive loan repayments. The company is burdened with $59-billion (U.S.) in debt.

The debt standstill marks the end of Dubai’s credit-fuelled real estate explosion, which spurred construction of scores of ostentatious infrastructure projects, including the world’s tallest building and sprawling palm-shaped tourist resorts built on sand foundations.

It also raised the spectre of the largest sovereign default in nearly a decade and prompted fears of financial woes spreading to other economies just as the global recovery strives to take root.

The Dubai crisis could hit emerging-market sentiment and investor tolerance for risk, which have both helped drive the global economic recovery this year, Scotia Capital currency strategist Sacha Tihanyi warned. The proposal to delay the debt repayment caught many investors off guard.