Around the world, investors are breathing a sigh of relief as the surprise financial crisis in Dubai starts looking more and more like a regional, not global, contagion. But the crisis has shined a spotlight on the dangers of overleveraged governments – and every American should be paying attention.
In many ways, Dubai is a special case. It’s a glitzy city-state controlled by a sheikh, populated mostly by migrant workers at every level of the economic spectrum. It’s had a reputation as the Vegas of the Middle East – and its flashy, fast-rising hotels, shady forms of financing and (comparatively) lax social standards seemed to fit the bill.
Few people were surprised, then, when it turned out that Dubai had spent too long at the gambling table of world finance. But everyone was shocked at the amount of the damage. The government investment company Dubai World is seeking a reprieve on $60 billion worth of debt. The central government’s receipts in 2006 were $5.4 billion. No one knows how the government is going to guarantee the debt – or if the government is going to guarantee the debt.
For now, investors seem confident that the damage from the crisis can be contained – but if last year taught us anything, it’s that these crises never happen in isolation. If Dubai gets messier, expect the bond markets to steer clear of any government with heavy foreign debts. That includes the United States. The Dubai crisis should put Washington on high alert.
sfgate.com
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