I’ve read this article twice, and I simply do not understand the relationship between debtor nations and the real estate speculators at Dubai. Anyone want to fill me in?
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by John Cole| 49 Comments
This post is in: Foreign Affairs
I’ve read this article twice, and I simply do not understand the relationship between debtor nations and the real estate speculators at Dubai. Anyone want to fill me in?
Comments are closed.
eastriver
banks.
next.
MikeJ
The real estate speculators in Dubai were the government. If Dubai decides to defaukt on their debts, other countries may decide to or have to follow suit. If Dubai can’t pay up, the people it owes money to won’t like not having money. They’ll lean on other people that owe them to pay up.
Everybody everywhere is going to be nervous about loaning money to a country that might not repay it.
iluvcapra
Dubai is a sovereign entity, and uses a corporate shell called “Dubai World” to invest in real estate. Dubai World is a bit like Dubai’s Fanny Mae, except it make equity investment in CRE, instead of insuring residential debt, but it’s relationship to it’s mother government is similar.
Dubai World can’t make interest payments, and Dubai (the state) isn’t going to bail it out, like everyone was expecting. So now all of the sudden everyone is afraid that other small debtor sovereignties might get the same idea.
That and general paranoia of people looking over their portfolios and saying “wait, I hold debt in small countries! And DUBAI IS A SMALL COUNTRY! Maybe small countries are in for trouble.”
Brick Oven Bill
See Dubai was encouraging poor people to take out loans they couldn’t afford. It was all poor people’s fault. Now they want a bailout from the blood of dinosaurs.
Punchy
Those Sandys maaaaaaaaaaasively overbuilt their tiny nation, expecting houses to remain good investments as they sit artificially on ocean sand while waves and tides and shit continue to happen.
I knew it was a mess to fuck with Mama Nature when they started, and now it’s a gigantic debacle. Yet they kept building.
They do have a awesome collection of abandoned cars at their airport, however.
MattF
It’s ‘contagion’. Investors look at Dubai’s balance sheet and say to themselves “So, what’s the difference between Dubai and Scotland?”
Blue Neponset
I am can’t figure out it out either. Unless Greece, Britain and Ireland invested in real estate it doesn’t seem like their situations are similar to Dubai.
The Grand Panjandrum
Seems pretty obvious to me. Brad Pitt is fucking up the world’s economy and he has to be stopped.
Alien-Radio
Dubai is an excellent place to launder money, Russian Oligarchs, Arms Dealers, Narco Barons, Bankers etc.
Dubai property was the medium by which money was laundered, and while the money was in tax exile, or being cleaned a massive bubble was inevitable because there was a Massive amount of money flowing there utterly unrelated to a real economy.
Money may start flowing out of dubai to cover losses back home, but as long as it continues to turn a blind eye to financial shennanigans it won’t deflate as massively as it should.
eastriver
The Pitt and the Pendulum. It’s all becoming clear.
eastriver
The Pitt and the Pendulum. It’s all becoming clear.
DavidB
It has to do with collateral and assets. The issue is that RBS is undercapatilized; that’s where the quote “this is a solvency crisis, not a liquidity crisis” comes from.
One of the biggest problems we have here in the United States is that lines of credit to small businesses were cut last year and were not restored to this day, because banks hold exposure in real estate, both commercial and residential, that are not worth as much as they have on the books. If Dubai defaults, not only does that collateral become worth less, real estate collateral all over the world becomes worth less as well.
In other words, the financial system is still a house of cards built on a big shit pile. Dubai World is to UAE as Bear Stearns was to the US Treasury. Will the UAE let Dubai World fail? We will know on Monday.
jcricket
Don’t forget the debtors prisons they have there – causing the opposite of what we have in America (where people try and stay in their home until they are evicted). Ex-pats are abandoning their property (and cars) in droves and leaving the country rather than ending up in jail b/c they can’t make payments.
Dubai is the modern economy in a nutshell – artificial, built-on-debt, and expecting the promise of ever-rising asset prices. Oh, and no middle classes (lots of poor people farmed in to work at low rates to build the utopia for the rich).
Good times. Couldn’t happen to a better country.
JimPortlandOR
You really don’t want to know the details. It would be mean to tell you, for it would spoil your day.
We can’t handle the truth……
Way to think about this, if you must: Florida Condos built to ridiculous excess with bankster money, with a guarantee of repayment with YOUR taxpayer dollars, but with a Fed. Reserve that can’t make the scheduled payments.
Corner Stone
@Alien-Radio:
Sounds eerily familiar somehow…
Alien-Radio
@Corner Stone: Dubai, New York and London have a lot in common is this regard. They all provide a place for kleptocrats to get together, spend their money on a better class of hookers and buy class and influence and without having to live in switzerland, the caymans or lithuania, or the third world shit hole they ostensibly live in that they looted the money from.
Unlike dubai, new york and london at least have other industries to pick up the slack.
techno
Gee. It looks like debtors are beginning to have considerable power over creditors. It’s about time.
Now if we could just arrange a debtor’s strike here in USA…
NutellaonToast
Okie, so basically it’s a line you ahve to follow. It gets complicated so first we’ll just start with the beginning. It is:
Rich person has some money and wants to make it into more money.
Next, we’ll go straight to the end. The end is:
We’re fucked.
Now, in order to fill in the blanks we must complete the path by passing through all possible points in the universe.
That’s how we got where we are.
Brachiator
.
Sweet Boneless Jesus! Some actual wit from BOB. How often does that happen?
A number of presumably fantabulous celebrities and UK sports stars have invested in Dubai properties, and some great pictures of half-completed Dubai projects here.
But you will never see any news stories blaming rich people for stupidly making investments.
Two things. This is a big deal in world markets and especially the UK because a number of big British banks which previously received huge government bailouts are also on the hook for a chunk of the Dubai debt. This puts taxpayers on the hook again.
The ripple through smaller countries is similar to what happens when credit card companies raise interest rates astronomically on people with good credit histories. The financial markets are looking to hedge their bets, and have no problem screwing over countries in the same way that they screw over individuals.
ThatLeftTurnInABQ
@Blue Neponset:
Their situations don’t need to be similar for contagion to be a problem. In a solvency crisis, players have to sell assets to cover their sudden and unanticipated need for cash, which puts deflationary pressure on the price of all sorts of unrelated classes of assets – anything which was being held as an asset by the folks who are now under pressure to liquidate is vulnerable. It is like living in a dry, dry forest during a long drought. If you are living in a log cabin and the guy down the road just burned down his tent, you have a problem.
The benefits of our most recent era of globalization came in part from harvesting for short term gain the resources that could have been invested into creating firewalls between various sectors of the global economy. Instead we captured that money as arbitrage and spent it on other things. As a result, our world today is so highly interconnected and tightly coupled that every crisis is a global crisis. We live in Pandemic World, where there is nowhere to run and nowhere to hide.
Figuring out how to have global growth while wiring the world up in a more robust and less interconnected way, which is more resilient with regard to shocks, is one of the largest meta-level tasks for the next generation. The last great era of globalization in the late 19th and early 20th Cen had to go thru two world wars before they got it right. Hopefully we are wiser today and will do a better job of it than that.
NutellaonToast
You know, it occurs to me that — just as life continues to be high school as you enter the work force — international politics is just more high school. I mean, Dubai was one of the dorky brown kids in international politics. Then it turns out it has a rich daddy(massive oil reserves). So it builds all these cool buildings (daddy’s car) and attracts all these investments and international player status (popularity), this gives it an overinflated sense of being respected (ridiculous expansion of cool building initiative) and then shit hits the fan and we invade em or their economy collapses or whatever. (the jocks get invited to daddy’s house for a party and destroy it/rob it). It’s just like an 80’s movie, except Dubai doesn’t get the girl in the end.
Ah, the circle of life.
gwangung
You’re a cockeyed optimist, aren’t you?
Brachiator
Here’s an interesting related story on the mounting international debt crisis (Kazakh Bank Lost Billions in Western Investments)
So let’s see. Financial markets with no effective regulation, and “sophisticated” bankers and investors who let their greed get ahead of their common sense. Where have we seen this before?
ThatLeftTurnInABQ
@gwangung:
With the wisdom and perspicacity on display in our news media today, who wouldn’t be?
Ooooh look! A giant floating balloon! With a small boy on board!
gwangung
@Brachiator: I wonder connected this is to the counter parties to AIG and Geithner’s seeming madness at Treasury.
inkadu
@Alien-Radio: Exposing gross injustice makes me giggle.
Brachiator
@gwangung:
The Brits are taking the biggest hit on this. From one of the UK Mail stories.
It’s a global financial clusterf – . There’s not much point in overly focusing on Treasury, except to note that Geithner and his crew, like their counterparts elsewhere, are being outplayed by the financial whiz kids.
monkeyboy
To top it off, Dubai has long been a safe haven for organized crime and a good place to launder ill gotten gains – one scheme involving buying real estate with cash.
So one needs to how much of the “Dubai mess” is part of a scheme cooked up by crooks.
Basilisc
Here’s most of what you need to know about financial markets: At any given time, markets are in one of two phases, “greed” and “fear”.
In the “greed” phase, the root elements of events like the Dubai collapse (if they are even allowed to happen) are closely examined, and markets usually conclude that they were unique to that event (even if in fact there are other similar situations out there – but we won’t learn about those until they blow up, too).
In the “fear” phase, markets respond to an event like Dubai by looking for any other situation where there are similar risks/exposures/debtors/assets. And get out of them without thinking. This includes investors who should know better – because they think everyone else is about to panic. Which in turn leads to a state of panic.
So markets saw Dubai, and now they’re looking for a match: sovereign debt? Arab autocracies? Real estate? Whatever, they’re jittery and ready to sell at a moment’s notice. Unless it turns out that not that many others who can sell (which is what happens at the end of the “fear” phase – everyone who might have run has already run, so there’s no one left to sell). There’s also a withdrawal from all kinds of risk, simply on the assumption that everyone else is about to withdraw from all kinds of risk.
Isn’t the “fear” phase fun? And isn’t it great that so much of our economy is now hitched to these cycles, like a guy whose sweater got caught on a Dutch windmill?
Brachiator
@monkeyboy:
Probably very little. Criminals have to invest their money, just like any other big business.
On the other hand, organized crime bosses really, really don’t like to take big losses on their investments.
By the way, here’s another fun little UK story about the financial industry: More than 1,000 bankers are paid £1m every year (…but just don’t ask who they are)
But remember that these high salaries are necessary. How else are you going to get such great talent?
Martin
Two things that haven’t been covered here:
1) The shock isn’t that Dubai won’t bail out Dubai World. Nobody expected that. The shock is that Abu Dhabi isn’t bailing out Dubai. They are all member states of the UAE, with Abu Dhabi as the capitol. It’d be as if France couldn’t pay its debts and the EU was unwilling to bail them out, or to a lesser degree, if California couldn’t pay debts and the Fed was unwilling to bail them out.
Everyone expected that the other UAE states, who have oil revenues, would ensure that the bills get paid or else they’ll all have trouble down the road being trusted with debt. Investors aren’t always fair with their risk assessments, and if small middle-east nations look untrustworthy, they won’t always discriminate in favor of the ones that actually are trustworthy. Further, this is a major embarrassment for all Arab states in the region – they just don’t allow this to happen. This could have repercussions for Abu Dhabi who is also doing a massive build-out like Dubai (witness their brand new Formula 1 circuit complex) and even non UAE nations like Bahrain and Qatar who are charting a similar path.
2) All of these states are planning for peak oil. They know that their natural resources are running out and getting more expensive to acquire. They’re trying to build some other economy to take their place (Dubai has almost no oil economy now). The problem is that they are out in the middle of the desert with almost nothing to offer except for sun and water access, so they’re going with what they have – building coastal cities with unique amenities – amenities that include a large near slave-labor population. They’re all hoping to become the next New York, LA, and London rolled into one. They’re all embarking on a ‘build it and they will come’ strategy. Dubai’s is failing in spite of having done the best job on going big. The debt issues aside, if the lesson from Dubai is that nobody is going to move their corporate headquarters to the gulf peninsula, or their private fortunes there, then nobody will move them to Abu Dhabi or Bahrain or Doha or any of the other gulf states following Dubai’s strategy. They’re all looking like failures of varying magnitudes, and if they can’t stand on their own merits, how long will the oil hold out to pay these debts along with the next round of debt to finance a new plan that will hopefully work better.
The US housing bubble was one thing, and a commercial real-estate bubble is here following it, but these pale in comparison to what the gulf states are doing, not because they are larger in dollar scale, but because they are increasingly looking like full-on disasters. It sucks to get back $.50 on the dollar, like with Florida housing, but Dubai has built out so far that they’re going to face trouble just funding the maintenance of these buildings.
The problem for Abu Dhabi is that they know they need to build a new future and paying off Dubai’s foolish loans gets in the way of that, but that decision might just take them down as well if investors wonder if Abu Dhabi is about to be the next victim.
ThatLeftTurnInABQ
OK, since posting doom-and-gloom comments (especially on a topic like this) is like shooting fish in a barrel, I’m going to try for something with a higher degree of difficulty and actually be optimistic for a change. Take a gander at this exchange in the comments section over at Naked Capitalism:
So here we have the nearly unthinkable circa a few years ago. An actual honest-to-goodness live in the flesh policy maker, in the middle of drafting new proposals, mixing it up in comments with one of the sharpest of the econ/finance bloggers. And not behind closed doors, but out in the open for everybody to see. Quelle surprise! Is our children learning? Yes, in fact they are. Maybe there is hope after all.
ThatLeftTurnInABQ
Sigh – obligatory blockquote fail. Here is the quote from brad miller, in the comment above the rest was moi:
Brachiator
@Martin:
I don’t see much planning at all in the massive, pointless building projects that the rulers of Dubai were throwing up in the middle of the desert. They certainly weren’t creating much in the way of long term employment opportunities, or even much investing in infrastructure. And celebrity-centric ventures appeal to such an exceedingly small and fickle segment that no one in his or her right mind would stake their entire nation’s future on this kind of thing.
I agree with your other point that “the shock is that Abu Dhabi isn’t bailing out Dubai. “
Meg
No one explains this mess better than Max Keiser and Stacy Herbert. I follow them religiously and they predicted the Dubai mess (in addition to the Wall Street fiasco) a year ago. Max goes into more detail here related to Abu Dhabi.
Mike G
A number of presumably fantabulous celebrities and UK sports stars have invested in Dubai properties
Regarding Beckham and the other football stars on the palm islands, word is the developer gave them a 90% discount to buy in for the publicity value. I think they’ll do fine.
Dubai was a place for the oil staters to invest after they got nervous about US/Europe confiscating or restricting Arab assets in the wake of 9/11. Dubious Russian money was a major factor also.
Da Nihilist
Matt Damon’s character in Syriana had one of the best lines regarding oil rich emirates:
Forty2
Gosh, maybe building enormous office towers and a gazillion condos and artificial islands wasn’t so smaht in a place that’s often 120°F with high humidity that has no natural resources (the oil’s all in Abu Dhabi), no fresh water, nothing but sand; in other words a place where no sane person would ever want to visit much less live. The fact that idiot specu-tards snapped up all those condos and such is irrelevant given that construction has screeched to a halt; there’s a massive oversupply of properties that will likely never be sold and will either be demolished or collapse into the sand over time.
Not to mention that most of the workers building all this shit were more or less slaves; indentured workers from Bangladesh, India etc. lured to Dubai then presented with an enormous bill that they’d have to work off before they could go home. Of course, this bill could never be paid off.
I expect Dubai to be like Varosha/Famagusta in ten years: a ghost town of a resort. Good fucking riddance, and let it stand as a monument to greed, folly, and general human fuckwittedness.
Lancelot Link
Dubai World/ Nakheel has been failing to pay its debts for well over a year now; unfortunately, I know this for a fact.
Will
From the people I know that have worked in Dubai, it’s the world’s largest, dullest and yet still scariest shopping mall in the world. The place is clean, the jobs pay well and there is decent nightlife.
Most times, the cops look the other way if you are a Westerner, but sometimes they don’t. Everyone’s heard horror stories about people getting arrested for a minor or nonexistent violation and suddenly discovering that for all the soothing music and shining shops, the shopping mall has an authoritarian Third World nation’s legal system.
Comrade Darkness
@Basilisc: Which in turn leads to a
state of panic.buying opportunity for the small investor who has been waiting on the sidelines.Comrade Darkness
@Forty2: The first time I saw pics of those palm islands, I said, wow, that will make an excellent dive site in an hundred years.
rachel
@Will: The pay for ESL teachers is considerably higher there than it is in Korea, but they couldn’t pay me enough to go work there.
stickler
FOrtyTwo:
Well, except for the humidity bit, you’ve just described Las Vegas. Without Hoover Dam, Vegas was just a dusty hellhole. Now it’s casinos and hookers and bling, baby! If Dubai built a desalinization plant with a lot of solar panels, they’d be set.
(Or, less flippantly, Vegas has a problematic business model, but it’s done pretty well for itself from about 1960 to 2008. And it’ll probably do pretty well from 2010 until the water runs out.)
sheiler
Meg, thanks for the link to the Kaiser interview for FT. Amazing. I’d never heard of this guy. What’s scary for me is that Russia is now, thanks to the Dubai mess, buying Canadian currency en masse, in addition to gold. Instead of US dollars.
I make US dollars to pay for my humble little Quebec lifestyle. Uh oh. Better learn French faster and get out of the US altogether.
Martin
@Brachiator:
I didn’t say that they were *good* ideas, just that they were ideas.
Lining up the next New York sounds great on paper – nobody actually needs to work hard, no laboring – you just invite in the world’s Goldman Sachs and starlets and then profit!
Put another way, what’s their alternative? Glassmaking? Sand art? Exporting heat? They have nothing that the rest of the world doesn’t already have – sand and water. Sure they could build great solar plants but for what ends? To power their glassmaking factories?
And nobody predicted Dubai a year ago – a year ago it was already going on, and hell, everybody predicted it. It was like predicting in 2004 that Britney Spears would do something stupid and embarrassing.
Chuck
@MattF:
The fact that Scotland’s economy has not been described with the word “bubble” from Day One. But hey how would investors get billion-dollar bonuses without bubbles to invest in?
Brian Griffin
@monkeyboy: Dubai’s status as a safe haven ocurred after 9/11 of course.
I find it interesting that in all the discussion of how Vegas and Miami have been hurting lately it is so seldom mentioned that they both lost tons of money-laundering business to Dubai after 9/11, when transactions actually started getting tracked.
Brian Griffin
@Lancelot Link: Yeah I know this very well too, sadly enough.
People tend to assume that bankers will be the ones getting screwed. But they should know by now that’s rarely ever the case.
Hundreds of American (and other) design & engineering firms, equipment makers, contractors, and other companies were hired to build all that stuff that just stopped. Dubai owes tons of money to those people– I think we’ll see a lot more companies here going under if they default. I know a lot are holding on just hoping that Dubai pays at least part of their debt.