Argentina's default in 2001 didn't come out of the blue. Nor did Lehman's collapse. Yet both caused shockwaves. Now it may be Dubai's turn. Investors fear that a debt standstill by Dubai World, the city kingdom's largest state-owned conglomerate, is a prelude to a forced restructuring of its estimated $60bn of liabilities. This has caused a repricing of risk both in and beyond the Gulf. Bank share prices took a pummelling yesterday. HSBC, down 5 per cent, was among the worst hit, given its estimated $16bn exposure to the United Arab Emirates. The dollar and bunds rose.
But is it all such a big surprise? From the Tower of Babel to Kuala Lumpur's Petronas Tower, an uncanny historical correlation exists between building height and hubris. And at 810 metres, the Burj Dubai, due to be completed next year, will be the tallest building in the world.
What may have surprised investors is Dubai's relatively weak debt payment abilities. With a gross domestic product of about $75bn, the emirate's state-owned companies must repay some $22bn of bonds before the end of 2011. Yet Dubai also has a liberal tax regime, small hydrocarbon revenues and a persistent fiscal deficit. Future funds will therefore have to come through asset sales, new debt issuance or support from its richer UAE neighbour, Abu Dhabi. Sitting on the world's largest sovereign wealth fund, with $630bn of assets, it is not a question of can Abu Dhabi help, but will it – and for which assets and on what terms?