Default in the Desert

A Dubai government arm, Dubai World, asked its lenders to "standstill" on lending agreements for six months. Standard and Poors observed that what smelled like a payment default usually is and downgraded Dubai's debt. Happens all the time.

Dubai borrowed $80 billion to build islands, skyscrapers and golf courses, Dubai World borrowed $55 billion of it. Nakheel, Dubai World's construction unit, was to repay $3.5 billion to Shariah lenders on 14 December. Without tenants or buyers for partially developed units Nakheel was hard pressed to make the payment and six months here or there probably will not make a difference.

The banks involved include HSBC and the Royal Bank of Scotland, HSBC shares are down 6% in London looking for the nearest cliff.

India exports over $24 billion worth of merchandise to Dubai, has 1 million citizens employed there, receives over $2 billion a year in remittances from workers annually, and sources 70% of its annual oil requirement from the region. Naturally, none of the Indian companies involed in business with Dubai admit to having any exposure.

But what is the big deal about a $3.5 billion default in the desert?

Dubai could be Denver, or any other US city with commercial real estate being used as museum space for construction equipment. Property prices in Dubai are expected to decline another 20% before buyers dip their toes, presuming there are any toes left. A commensurate decline in the US would knock $1 trillion off the carrying value on the books of FDIC banks, and make TARP look like a minnow in the mouth of Moby Dick.