The Emirates is made up of seven "emirates" (the equivalent of states in the US). Abu Dhabi is the largest Emirate and the city of Abu Dhabi is the capital of the country. The Abu Dhabi emirate is also where most of the oil in this country lies. Hence, it has long been the richest and most prosperous of the Emirates (with an amazingly generous share-the-wealth program with the other Emirates... but that's a story for a different post).
Ten years ago the Emirate of Dubai realized that their emirate's oil money wouldn't last forever. Dubai's oil reserves may run out in the next decade. So they decided to diversify. In an incredibly ambitious endeavor they wanted Dubai to become a leading financial center, free trade zone, tourism hotspot and resort for the world's wealthiest. They also bought up assets from around the world. Two examples: The Queen Elizabeth 2 ocean liner and Dubai Ports (remember the uproar in the US when Dubai Ports offered to buy the maintenance contracts for New York and other major harbors?)
In a world of cheap money development soared in Dubai. By 2008 it was estimated that 20% of the world's building cranes were located in this one city. They built the huge indoor ski slope, built man-made islands in the Persian Gulf, and the world's tallest building.
All of this began to overshadow Abu Dhabi. Pause. Think about that.
As the financial crisis swept the world the foreign money invested in Dubai began to dry up quickly. Donald Trump was one of the first to hit the exit as he cancelled a major project. Many customers - businesses hoping to open and people hoping to buy million dollar sky rise apartments - simply vanished.
Now Dubai is having serious cash flow problems and is unable to make all of its payments. Because the development companies are largely owned by the government this is more than just a private company possibly going bankrupt, it is a sovereign state unable to pay its bills.
Other countries have faced the situation of not being able to pay bills. What makes this one unique is the size - $80 billion - and the fact that Abu Dhabi has more than enough money to cover this. After years of saving money and with current oil prices at $75/barrel the oil rich capital could bail out Dubai if it wanted to.
The Dubai announcement was at the beginning of a four day holiday. That bought them some time to sort things out. But hopes of Abu Dhabi riding in for a rescue were dashed when it was announced they'd be willing to buy Dubai assets on a "case-by-case basis." In other words, "We don't want your toxic assets. We'll cherry pick from the best."
On Monday the financial markets reopen in Dubai. I suspect no amount of Tums is helping investors sleep tonight.
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