Dubai - A mirage or the real deal?

Is this the start of the falling dominoes, or this is the worst to have come? Dubai World and Nakheel, both government-linked conglomerates, have asked for a standstill of six months from its creditors. Although both the Dubai and US markets are close for Eid-alAdha and Thanksgiving holidays respectively, the news have spread like virus and hammered markets worldwide. Investors are quickly having doubts on the global economic recovery since March, sending the yen high and the dollar down. Treasury yields also dropped as investors are buying bonds, and seemingly abandoning riskier assets.

Fear of a massive default and heavy losses at banks and companies worldwide holding on Dubai's debt has sent investors scurrying for exits. They doubt that the Emirate would be able to restructure their debts, which amounted close to USD80 billion. Nothing they had done publicly so far instilled any confidence to investors, therefore the shock announcement inevitably raised doubts about other countries' debts as well.

Any credibility that Dubai has built up over the years as a safe haven for investment in the Middle East, which attracted hot money going into real estate, has quickly vanished into thin air as the news broke. Investors are beginning to speculate whether the financially rich Abu Dhabi would help to bail out Dubai. If not, then Dubai has no choice but to liquidate its real estate holdings to repay.

International banks like HSBC and Standard Chartered are being questioned about their exposure to Dubai debts. It is anyone's guess which banks are affected, and to what degree the exposure is. It could seriously derail the nascent recovery to the global banking industry since March.

What happens next depend on a few things. Abu Dhabi, creditors and Dubai itself. If this issue could be contained within reasonable time and not allowed to fester, then the domino would stop at there. Otherwise, the guessing game of who is going to fail next will be raging.