Skip to main content

Heavy fog rolls by early in the morning near the Dubai Marina.


A mounting debt crisis in Dubai, the Gulf emirate whose boundless extravagance came to symbolize the excesses of cheap credit, is rattling investor confidence in emerging markets and raising fears of contagion in the financial sector.

Global stock markets, commodities and emerging market currencies retreated sharply Thursday after state-owned investment conglomerate Dubai World asked for a six-month reprieve on its massive loan repayments.

The company is burdened with $59-billion (U.S.) in debt.

Story continues below advertisement

The debt standstill marks the end of Dubai's credit-fuelled real estate explosion, which spurred construction of scores of ostentatious infrastructure projects, including the world's tallest building and sprawling palm-shaped tourist resorts built on sand foundations.

It also raised the spectre of the largest sovereign default in nearly a decade and prompted fears of financial woes spreading to other economies just as the global recovery strives to take root.

The Dubai crisis could hit emerging-market sentiment and investor tolerance for risk, which have both helped drive the global economic recovery this year, Scotia Capital currency strategist Sacha Tihanyi warned.

The impact of a default by Dubai could spread to other countries, he said, particularly those that have significant exposure to the region.

"The thing that would make anyone nervous is the fact that this is a financial-sector shock. It was financial-sector shocks that played such an intensive role in the recession and financial crisis," Mr. Tihanyi said in an interview.

Indeed, shares of banks with exposure to Dubai World debt or holdings in the United Arab Emirates, including HSBC, Barclays and Royal Bank of Scotland, fell sharply on the news. European markets suffered their largest one-day decline in seven months, dropping more than 3 per cent. Emerging-market currencies and equity markets sank. Brazilian shares dropped more than 2 per cent and Mexican stocks lost about 3 per cent. Commodities, including oil and base metals also lost ground. Even gold, which has surged to record levels in recent weeks, sold off as investors reined in their risk exposure.

"Dubai is the most indicative of the huge global liquidity boom, and now in the aftermath there will be further defaults to come in emerging markets and globally," Nick Chamie, chief of emerging-market research at RBC Dominion Securities, told Bloomberg News.

Story continues below advertisement

Canadian financial institutions are believed to have little exposure to Dubai World, whose wide-ranging holdings include real estate in the Gulf, the troubled U.S. retailer Barneys and a 20-per-cent interest in Canada's Cirque du Soleil performance group. Manulife Financial Corp. issued a statement indicating it has "no exposure to Dubai World or its affiliates."

The proposal to delay the debt repayment caught many investors off guard.

Earlier this month, Dubai's ruler, Sheik Mohammed bin Rashad al-Maktoum pledged his support for the state corporation and its debt obligations. Now, the conglomerate, whose motto is the "Sun never sets on Dubai World," is technically in default.

Currency and commodities analyst Dennis Gartman, however, said the debt restructuring should come as no surprise.

Dubai and its sovereign wealth fund "had rather obviously overextended, garishly so," Mr. Gartman told subscribers to the Gartman Letter.

"Icarus flew too close to the sun, and Dubai and its developers did the same."

Story continues below advertisement

Scotia Capital economists Derek Holt and Karen Cordes told clients in a report that Dubai's borrowing excesses and asset bubble risks were unsustainable.

"In some sense when we look back upon it, maybe this isn't such a surprise after all. There was always something a little Land of Oz-like to Dubai, as if it were a modern-day Rome, symbolic of an overstretched empire in the years of leveraged bubble excess," they said.

With files from reporter Tara Perkins in Toronto

Report an error Licensing Options
About the Authors
Asia-Pacific Reporter

An award-winning journalist, Andy Hoffman is the Asia-Pacific Reporter for Canada's national newspaper, The Globe and Mail. More

Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

Comments are closed

We have closed comments on this story for legal reasons. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

Combined Shape Created with Sketch.

Combined Shape Created with Sketch.

Thank you!

You are now subscribed to the newsletter at

You can unsubscribe from this newsletter or Globe promotions at any time by clicking the link at the bottom of the newsletter, or by emailing us at