So will the rulers of Dubai be imprisoning themselves, lopping off an arm, or confining the family to the emirate, as they have done to countless lesser mortals who default on their debts, or can’t repay them after being sacked?

Indebtedness in the Middle East can bring terrible pain for some people: physical disfigurement has been reported with people having a hand chopped off, homes have been seized, people put in prison for months without a trial, many of them foreigners who have been sacked by local companies battling the downturn.

As in all autocracies there’s one rule for the rulers and another set completely different for the rest, including foreigners. So what of foreign companies in Dubai: Leighton Holdings, Sunland, WorleyParsons in Australia. Global banks such as HSBC and Citigroup with local branches? UBS, the Swiss bank has already confirmed it has a small, but not material exposure to Dubai.

The Dubai Government move could cut all credit and liquidity cut to local operations by offshore head offices fearful of further implosions. The Emirates not only own airlines; Emirates (Dubai), Etihad (UAE); but also ports in Europe, Australia, the Middle East, Africa and parts of Asia; Barneys, the upmarket New York store, a swag of shares in the London Stock Exchange; about 9% each in Porsche and Daimler, shares in major banks, such as Citi, HSBC.

There was an exquisite sense of irony in the local media this morning with the report saying Emirates and Etihad wanted more access to Australia, perhaps, not quite yet after the Dubai move.

Emirates investment funds, mostly from Dubai, Abu Dahbi and Qatar, also have stakes in a host of financial and industrial groups around the world such as such as Ziff-Orch, the American hedge fund operator, Carlyle, the private equity group in the US, one of India’s biggest banks, ICICI. Dubai investment funds also have investments in AMD, the US chip maker and in Sony, the Japanese electronics giant.

This report in a Gulf newspaper is typical  of the climate of fear for those who have debts, ranging from car loans, unpaid credit card balances and property leases or loans.

The New York Times reported similarly in February:

“With Dubai’s economy in free fall, newspapers have reported that more than 3000 cars sit abandoned in the parking lot at the Dubai Airport, left by fleeing, debt-ridden foreigners (who could in fact be imprisoned if they failed to pay their bills). Some are said to have maxed-out credit cards inside and notes of apology taped to the windshield.”

Now what will the ruling family and Dubai government do themselves, seeing that have proposed what they deny to ordinary people, the chance to halt debt repayments and demand renegotiation?

Sheikh Mohammed Bin Rashid Al Maktoum and his family, well-known racehorse owners and breeders (in the UK, Australia, Dubai etc), have shocked global markets by telling them they want a six months standstill on some of the debt issued by Dubai World.

After markets in Europe tumbled, the Sheikh issued a statement defending the move as sensible.

“While the government understands the concerns of the market and the creditors, it had to intervene because of the need to take decisive action to address its particular debt ­burden.

“We want to ensure resources are deployed … to enhance the businesses of Dubai World Group, build on the restructuring … and ensure long-term commercial success.” He said that further information would be given early next week.

Global markets and didn’t see the irony that of all the victims selected by themselves for collapse in the global financial crisis, Dubai, essentially an oil-based Arab sheikdom, would not have been high on their list. Brazil, Italy, Greece, Russia, Ukraine, Ireland were all ahead of Dubai on the list of countries most likely to default, even after it was bailed out last February by the central bank of the United Arab Emirates.

Some market reports compared the Dubai move in the same context as Argentina’s default in 2001 and then Lehman Brothers failure in September 2008 for impacting global market sentiment. Why not Russia in 1998. The sense of shock is palpable among foreign investors, but banks and others have known since February that Dubai was tottering, and yet they chose to listen to the blandishment and words of reassurance from the Maktoums and their appointed advisers, right up until Wednesday’s surprise announcement.

So while Americans ate their Thanksgiving turkey, financial markets were being stuffed by the Dubai goose.

The stuffing could leave a nasty taste: futures show a 2.2% fall on the US S&P 500 index when trading resumes tomorrow for half a day, we will know if Dubai has sparked the resurgence of risk aversion and the start of a correction to the long rebound in markets since March.

That was after European markets fell 3% after Dubai’s shock call to suspend the debt of a key state company fuelled anxiety about excessive public borrowing, analysts said.

The London market fell 3.15%, its worst day’s fall since March and the depths of the slump.

Frankfurt sank 2.9% and Paris shed 3.28%. Europe’s Dow Jones Stoxx 600 Index fell 3.3% as the region’s markets weakened on the Dubai news.

The Financial Times‘ Lex column spared no one in the Emirate:

“Dubai’s hopes of becoming a world financial centre are proving to be nothing more than an Ozymandian dream. Wednesday’s unexpected decision by Dubai World, the Gulf emirate’s largest state-owned conglomerate, to impose a six-month debt standstill has foreign creditors up in arms.

“Earlier this month, Dubai’s ruler Sheikh Mohammed Bin Rashid Al Maktoum publicly pledged his support for the group and its obligations. Investors, perhaps foolishly, took him at his word. The consequences of the standstill, and possible eventual default, are far-ranging. The repayment of Dubai World’s $4 billion Nakheel bond was seen as a litmus test for the emirate’s ability to deal with the $80 billion owed by the sovereign and its state-controlled companies.

“The emirate’s willingness to do this is now in doubt, especially as only an hour earlier it raised $5 billion from two state-controlled banks in Abu Dhabi. This was only half what had been expected, but followed $10 billion of earlier support from the kingdom’s richer neighbour. Foreign creditors are muttering darkly about taking legal action. Credit default swaps on Dubai’s sovereign debt have exploded to levels higher even than Iceland’s, according to CMA Datavision.”

Oh, dear, worse than Iceland, which went broke, effectively; its collapse being cushioned by aid from various groups, such as the IMF, the European Union and nearby banks and governments.

The UAE, especially Abu Dhabi, will have to come to Dubai’s aid, even though it has already stumped up, one way or another $US15 billion of a $US20 billion bond issue launched in February by the Dubai government. It has mist of the oil and oodles of cash. The Maktoum family may be forced to go cap in hand and suffer the public indignity of being branded a debtor, or worse, a defaulter, in that they can’t pay, or refuse to pay.

What about all those racehorses, the half a billion dollars paid for the Ingham family racing interest in Australia, and the huge stables in Europe and Dubai?

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Peter Fray
Peter Fray
Editor-in-chief of Crikey