Case Study Of Dubai's Debt Crisis

1.0 Introduction

Dubai’s debt exists as a fundamentally important aspect of modern economic research. Set against a backdrop of fluctuating stock prices, an unstable real estate market and an uncertain world economy, speculation about the future of Dubai is rife, despite Dubai initially appearing to bear the global financial crisis far better than most other affected countries.

However, Dubai shocked the world by requesting a moratorium on debt repayment on 25 of November 2009. Foreign banks had previously pumped significant amounts of money into Dubai as loans and investment, knowing that they would suffer huge losses if the emirate defaulted on its debt. Thus, Dubai’s requested prompted financial markets worldwide to plummet immediately.

On November 25, 2009, the Dubai government announced that the company intends to ask all providers of financing to Dubai World and its subsidiary Nakheel to standstill and extend maturities until 30 May 2010. However, towards the end of 2009, 10,500 employees were made redundant as part of a restructuring plan carried out with the help of Deloitte consultants (Twins, 2009).

At that time, Dubai World had debts amounting to US$ 59 billion, including a US$ 3.5 billion loan which the company had been forced to default (Naseer, 2009). Research showed that US$ 3.5 billion actually accounted for almost three-quarters of the UAE’s total debt of US$ 80 billion debt (Smith and Kiwan, 2009).

Initially, the government of Dubai had refused to guarantee the debt of Dubai World due to sharp drop in the stock market of both Abu Dhabi (8.3%) and Dubai (7.3%) to the lowest levels in over 12 month amid the false belief, on the part of creditors, that Dubai World exists as part of the government. With this refusal, a global panic started as it had confirmed the false belief and that the company would now be unable to immediately pay its