Dubai Seeking Options Amidst Debt Collapse, Banks Await

Dubai is scrambling. Earlier this week, news broke that Dubai’s World Fund is on the brink of default on its massive debt, which sent bank stocks sinking as investors worried about potential exposure. Now, we learn that the ruler of the recently booming city state left town for an important meeting in a desert palace.

Where did he go? To Abu Dhabi, Dubai’s immediate neighbor in the United Arab Emirates, a country whose balance sheet is flush with cash (derived from the trade of oil). Details have not yet emerged regarding the content of the meeting, but the motive of this new relationship is clear. Abu Dhabi can be Dubai’s white knight if it chooses to do so, using its own reserves to rescue the Dubai World Fund from impending financial catastrophe.

Analysts across the globe are poring over data, and analyzing internal information as well. As the fund has nearly $60 Billion in Total Debt floating, the reach of this collapse could be great, though early statements note that the net exposure for each institution may not be. Speculators contend though that this could be another Lehman Brothers, where the cascading effect is far worse than the single event in itself.

Abu Dhabi’s action (or lack thereof) will set the tone for the coming weeks, as this news continues to effect global markets. Dubai, up until this week, had been regarded as a desert dream factory, an oasis in the Middle East. The country possessed booming wealth, and sported amenities like a seven star hotel, and indoor ski slopes. But, as the global recession depends, the reckless spender has been brought back down to earth. In this process, bank stocks have followed suit.

Earlier this month, Dubai’s ruler Sheik Mohammed bin Rushad Al-Maktown told media critics to “shut up,” and sought to assure international investors that all was well with Dubai’s finances. Dubai’s pockets are now empty, drained by collapsing real estate prices and overly ambitious development plans. Depleting confidence in Dubai carries serious risks for Abu Dhabi as well, said Hani Sabra of Eurasis Group, a US based research firm.

Banks across the globe are researching the extent of their relationship with Dubai this weekend, and more information should emerge on Monday. As it does, markets will surely respond – as global markets sunk on Thursday and Friday, bad information could put banks further into a tailspin and risk widespread panic.