By now a lot of internet bandwidth has been consumed by discussions about the Dubai debt repayment crisis and its possible impact. The timing of the announcement was such that immediate discussions could be kept to the minimum - The Arab world was in the midst of Eid, the United States was closed for thanks giving and it was  one day to the weekend in the rest of the world. But given the 24 x 7 x 365 nature of today's news and business cycles, there is only so much of discussion you can hope to keep down.

So, government after government and company after company has gone on record to assure one and all that they will not be affected or that their exposure will be limited. As i write this, the Royal bank of Scotland and HSBC are supposed to have the maximum exposure to Dubai's debt.

What exactly is the crisis?

Dubai took on an unprecedented level of real estate and infrastructure development both at home and abroad to move itself from being an oil dependent economy to a tourism and financial services hub of the world, building edifices that out marveled the best elsewhere. This program was channeled through government owned companies which took on huge amounts of debt to finance the effort. This debt (USD 59 billions which is affected by the current crisis) is by government owned companies and are backed by sovereign guarantees of the Dubai Government. And as we will see in a minute, that is the bigger problem.

With the global financial crisis (on hindsight, is the crisis over yet?) demand and therefore price for the high priced infrastructure that is being built in Dubai fell and obviously there is no longer a queue of the rich and the famous waiting to move in.

To cut the long story short, two of the agencies that were fronting the effort - Dubai World and Nakheel have called for a six month moratorium on interest payments so that they can restructure their business. The loans have not been defaulted. That is the good part. 

How much money is involved?

The number I am working out is a pure shot in the dark. I have no experience in multi-billion dollar loans or their interest deferments. So, take these figures with huge bagsful of salt. USD 59 billions at 3% annual interest for six months works out to a little under a billion dollars (0.89 billions); small change in the global financial system, much less than the bail out monies doled out to banks across the world by various governments. The impact of the announcement has been much more than the quantum of money involved. The reasons are obvious. We are talking about one of the economic hubs of the world defaulting on a loan. We are talking about a eminently rich country and its government being involved. We are talking about a country that already owns or is in the process of building up enormous real estate, infrastructure and business assets in almost every country in the globe. We are talking a bet that placed all eggs of a country in one basket possibly going awry if not wrong; of more bad news down the line and horror of horrors, a possibility (however remote that be) on a default of a sovereign guarantee.

What will happen next?

The moratorium will be granted, if nothing else, for the fact that the amounts involved are too huge and there is no other choice. The debt would be restructured. The key question is what else? What if six months is not enough? What if the current disclosure is only the tip of the proverbial iceberg? What if this and more debts move to default. Then comes the question of sovereign guarantees provided to the loans by the Dubai Government? Invoking a sovereign guarantee while not unheard of, was never in the consideration list in the context of the oil rich Persian Gulf countries.  Now, horror of horrors, what if the guarantee is also defaulted? Even that has happened in the past - in Peru in 1996 and in Argentina in 2001, and the consequences to the area and to businesses (bankers, investors, builders, service providers etc.) can be disastrous. More disastrous would be the impact economic psyche of a world just struggling out of a major recession.

One of the key issues that will determine the level of impact will of course be whether the crisis can be contained to this one time deferment of  interest payments by six months, or whether there will be a cascading effect that goes beyond the interest on 59 billion dollars for six months to other debts of Dubai World, beyond Dubai World and onto other enterprises in Dubai, to the rest of the Middle East and then on to Europe and the rest of the world.

Needless to say, the resolution of the crisis and how it exactly plays out will not be based on economic decisions alone, but on geo-political factors, give and take and many games of one -upmanship and a lots of back room negotiations and deals that we will never get to hear about. 

The key question then, is not whether a resolution will happen, but what else will happen before there is a resolution of this crisis .

Continued in : 10 sectors of the Indian economy that will be affected by the Dubai debt repayment crisis