[NOTE: DOW dropped 154.48 points today due to this news. Tony]
Dubai dazzled the world with its extravagance and excess. Now it wants to defer its debts. What went wrong, asks Richard Spencer.
By Richard Spencer
Published: 7:52AM GMT 27 Nov 2009
Early one morning at the end of last month, a throaty roar rippled over the sands of the Arabian desert. As it grew in pitch in the warm dawn air, it also became fainter, reverberating through the vacant car parks and abandoned building sites of the city towards the calm waters and newly built islands of the Persian Gulf.
As the caravan disappeared over the western horizon, it lumbered rather more than you might expect from one made up of luxury sports cars: but then, there were 82 of them. The Ferrari Owners’ Club was on its way.
It could only be Dubai. The emirate – the very term has oriental echoes of excess – does nothing by halves, and though analysts said the financial crisis would induce a sober new realism, we in Dubai didn’t listen.
When we go to watch Formula 1 in Abu Dhabi – the case that Saturday morning – we go by police-escorted Ferrari convoy. When we build new buildings, we build them higher than any that have gone before. Then we build more of them. When we build sandcastles in the shape of palm trees, full of splashy houses with swimming pools and private beaches, we don’t just order one. We have three (two are deserted).
And when we decide, after months of silence, to issue statements about our financial problems, we do not whisper honeyed words: we drop noisy, clattering bombshells.
So it was on Wednesday night, just as the lights went out at the start of the lengthy Eid al-Adha holiday and the city’s expat banking legions headed off for a break at their favoured Shangri-la or Kempinski resorts along the coast.
A little background: everyone knew that Dubai Inc, the mixture of royal and government holding companies that dominate the economy, owed a lot of money, but no one worried because everyone knew it had plans in place to repay them.
Not so, as it turned out. The brief statement was short but, in the words of one banker, desperate. “Dubai World intends to ask all providers of financing to Dubai World and Nakheel to ‘standstill’ and extend maturities until at least 30 May 2010.”
In a nutshell, the government was asking banks to let two of Dubai’s most famous companies hold off on their mortgage payments. Since they are state-owned, the announcement suggested the city itself was in trouble: governments aren’t supposed to default on their debts, and when they do – as Argentina did in 2001 – it causes chaos around the world.
Yesterday, the creditors didn’t know whether to laugh or cry. On the one hand, this is an undoubtedly serious situation. Western banks, and the construction firms that built those castles in the sand, are exposed to serious amounts of money. Dubai’s total government owings are officially $80 billion, unofficially twice that, and the cash flow to pay that back is a mystery.
More to the point, confidence had returned to the city’s dealings, its companies were rehiring, precisely on the same assumptions that have seen rising property prices in London and rising stock markets everywhere. The crisis was over, meltdown averted, and growth was back.
But if Dubai’s revival turns out to be fake, perhaps the rest is, too?
Yesterday, share prices around the world fell as the news was absorbed. One analyst asked whether this was the “new Lehman brothers”.
On the other hand, the opportunity for a spot of schadenfreude is also great. There was always a culture clash between the two halves of Dubai’s expatriate face, between the smart financiers, lawyers and other professionals who were putting down the structure of the revamped city, and those for whom it was being built.
Long-standing residents – none, of course, will be named, as they are ever so discreet – often looked with horror as their clients used the money they had raised to build glitzy villas on Palm Jumeirah, Nakheel’s showpiece development, and then give them away in staged publicity stunts to David Beckham.
When Kylie Minogue performed to invited Hollywood celebrities at the opening of Sol Kerzner’s kitsch Atlantis Hotel, the public relations merchants beamed assiduously. Those who didn’t have to be there turned up their noses. “Disney Dubai,” one British expat said to me later. He prefers to commute from Sharjah, the neighbouring emirate, which doesn’t allow alcohol, let alone invite pop stars.
“It seems odd to have ended up somewhere so full of tackiness, but that’s how it is,” one of Dubai’s most publicly bullish bankers put it, slightly more tactfully.
One man who could be forgiven for schadenfreude is Christopher Davidson. A writer and academic, his book Dubai: the Vulnerability of Success, warned long before crisis struck that the city had built an unsustainable, hubristic model. He is scathing about the emirate’s loyal westerners.
“This is one of the perils of having a large mercenary population,” he said. “They will say what you want to hear to your face. Then when it all goes wrong, they go home.”
Many have indeed gone home, though not in such large numbers as once feared. You can still see cars covered in dust at Dubai Airport, where owners have abandoned them as they flee, anxious that shortfalls in hire purchase payments could land them in the city’s notorious debtors’ prison.
“At least I mailed my keys back,” said Nicholas Down, an estate agent.
Mr Davidson is even more scathing of Dubai’s latest announcement, partly because he says it is 12 months too late, and partly because it does not show that lessons have been truly learned.
All year, Dubai’s charismatic ruler, Sheikh Mohammed bin Rashid al-Maktoum, has angrily brushed off reports of imminent doom. In September, when asked if he admitted to any mistakes, he said not.
Earlier this month, he said bluntly that those who talked about much-rumoured strains between Dubai and its sister city Abu Dhabi over the crisis should just “shut up”.
Mr Davidson said that finally admitting to the full extent of the crisis on the eve of a public holiday was such an “obvious trick” it suggested the city thought it could still “get away with it”. It was self-evident, though, that investors still needed reassuring.
“Does anyone in the Dubai government have a grip on the situation?” he asked. “If not, should anyone put their money in the place?”
The irony is that a large part of Dubai Inc still works remarkably well – the bit that hasn’t had anything to do with David Beckham, or Paris Hilton, who filmed her latest television show here, or the British wannabes who bought unbuilt holiday homes for the sun-sea-and-sand lifestyle.
Dubai’s port is the biggest in the Middle East. Emirates Airlines still makes profits. Passengers at the airport are increasing in number. The city’s traders – Iraqis and Iranians, Lebanese and Pakistani – wheel and deal with a lot more ease and comfort than they would at home. “Dubai,” one Indian businessman replied when asked which was the best Indian city in which to do business.
Dubai’s own business leaders are reluctant nowadays to come forward for interview. For this article, a spokesman for the department of finance – another western public relations consultant – was prepared to defend the system.
“They have taken this step,” he said. “It’s a long-term decision which has been taken to restructure the financing. It’s a process that has just begun. It will take some time to work through.”
But even supposing the creditors hold off in their demands – and what choice do they have? – they can hardly send Sheikh Mohammed to debtors’ prison: it is still anybody’s guess as to where the repayments will come from. A frightening proportion of the debts are due to be repaid in the next three years.
The answer to date has been Abu Dhabi, which sits on a sea of oil and foreign exchange reserves. On Wednesday, its banks said they would stump up $5 billion – though apparently with the proviso that it is not poured down the “bottomless pit” of Nakheel.
Its own royal family regularly puts on a united front with Sheikh Mohammed – the two houses are tied by marriage. A bail-out is surely on its way, but no one knows what conditions may be attached.
When the Ferrari owners set off last month, they did not invite the press, and deliberately left before most residents were up. Perhaps there is a new modesty afoot after all.
But then perhaps they were not going to watch the motor racing at all: maybe they were off to Abu Dhabi to ask for their car loans to be repaid, and their tanks to be filled with petrol.
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