This week, the government of Dubai decided to delay payment on the tens of billions of dollars that it’s Dubai World holding owes to various creditors (UBS speculates as much as $80B). Dubai World is the vehicle through which the state has invested heavily in various real estate projects around the world. In order to fund the expansive projects and investments, the government sought billions in debt to fuel their initiatives.
By delaying payment Dubai has not only created serious doubts about its dedication and ability to repay its loans, but also the credit worthiness and risk-level for other sovereigns. The price to insure against debt-default by Dubai more than doubled (from $300M to $675M). Additionally, the price of default insurance rose in general for many sovereigns, including Bulgaria, Abu Dhabi, Hungary, the U.K. and the U.S. (see graphic below).
It’s unclear at this point to what extent concerns for default (or an actual default) by Dubai would act as a contagion, setting off another global financial crisis. On Friday, global markets took a significant hit based largely on investor reaction to the payment delay. U.S. and Asian markets took the biggest hits, with European markets managing to close higher on the on the day.