Rebirth of England.

Chapter 717 Dubai Debt Crisis
"Your Highness, we have already started negotiations with Dubai World Group on the acquisition of their Iron and Steel Shipping Company. It seems that their attitude is still very positive..."

Finn Hudson, CEO of Global Industrial Investment Fund (GII), told Barron's on the phone:

"After all, they need funds now because of the sovereign debt problem and are preparing to restructure the largest corporate entity they own."

Many people know that after the subprime mortgage crisis, a sovereign debt crisis broke out in Europe, mainly in the "PIIGS" countries, but probably few people know that earlier, the Dubai sovereign debt crisis also broke out in the UAE.

The full name of the UAE is "United Arab Emirates", which consists of seven emirates. The most well-known of them, Dubai, is actually one of their emirates - the Emirate of Dubai.

Just last month, the UAE's Dubai emirate announced that it would restructure its largest corporate entity, DB World, and delay its debt repayments for six months due to its huge debt problems.

Influenced by this news, European stock markets plummeted, with some bank stocks generally falling by around 4%.

This is because a considerable proportion of Dubai World's creditors are European banking institutions. Among them, the British creditors alone include HSBC Holdings, Barclays, Rice and Royal Bank of Scotland.

On the day the news was released, the European stocks of these banks generally fell 2% during intraday trading.

The Dubai government has stated that it has appointed Deloitte to lead the debt restructuring, but market participants are worried that because Dubai has been too dependent on foreign capital in the past and international financial institutions are heavily involved, these institutions may face huge losses and bad debts in the future and suffer another blow just as they have recovered.

According to data obtained by Barron's, the Emirate of Dubai currently has a total debt of more than $800 billion. As the largest entity under their control, Dubai World has a debt of nearly $600 billion, more than half of which is held by European banks.

Dubai World Group, whose businesses span real estate and port shipping, is the largest entity in the Emirate of Dubai. From Dubai's famous Burj Al Arab Hotel to the Burj Khalifa that will be completed next year, and even Dubai's famous real estate projects such as the Palm Island, all are invested in by Dubai World Group.

And five years ago, Dubai World Group also acquired the well-known port and shipping company British Iron and Steel Shipping Company, making it one of the largest related groups in the world.

However, Dubai World Group's current debt is as high as 600 billion US dollars, and their third batch of debts of 57 billion US dollars, which is about to mature, can no longer be repaid on time and needs to be postponed for 6 months, until May 2010. This has caused its sovereign credit rating to be hit and downgraded by many rating agencies, making it even more difficult to continue financing.

Speaking of Dubai, many people think that it is very rich and has many "spectacular projects", such as the Dubai Tower, Palm Island and the Burj Al Arab...

So why would a sovereign debt crisis break out in such a wealthy place?
Dubai's rapid development has always been called the "Dubai model", which refers to an economic development model dominated by high-end real estate and finance. It relies on large-scale debt and financing to build large-scale projects, attempting to drive financial leverage to "compound interest" and thus boost economic development.

In fact, although the UAE is a member of OPEC, among the seven emirates in the UAE, Dubai is the one with the least oil resources...

Therefore, since the last century, when faced with the depletion of oil resources, they began to transform, hoping to obtain stable income by developing the financial industry, real estate and tourism.

To this end, they began to borrow heavily. In fact, those "spectacular projects" in Dubai were mainly financed, and the big moneymakers were the other emirates of the UAE and Saudi Arabia, the real "rich countries". In addition, European and American banks also provided them with a lot of funds. But first of all, in terms of finance, in recent years they have invested heavily in the international financial industry, with many large acquisitions, such as investing in American companies, and European banks including Deutsche Bank, which also have large investments, including the British Iron and Steel Shipping Company they acquired before...

But during the subprime mortgage crisis that broke out last year, due to the global economic recession, all of their investments suffered huge losses...

But the most important thing is that according to data obtained by Barron's, 90% of Dubai's sovereign funds rely on loans to finance acquisition projects rather than their own money. Dubai World has successively borrowed from many banks in the Middle East and Europe...

Istithmar, an investment company under Dubai World, has carried out acquisitions totaling US$2003 billion since 270, of which their own investment was only US$25 billion!
The current debt of the Emirate of Dubai is as high as US$880 billion, which exceeds its GDP last year and accounts for 48% of the entire UAE debt. The debt of Dubai World alone is as high as US$590 billion. With such a high debt ratio, when the economy is booming, the lurking crisis is often masked by soaring housing prices, popular investment projects and models, and high market expectations. However, once the situation changes, investors' expectations are reversed, market confidence is lost, and funds flee in large numbers, a debt crisis will occur.

Speaking of housing prices, it is also one of the main reasons for Dubai's sovereign debt crisis this time. Just like their financial investments, in order to develop real estate and tourism, Dubai first needs to have considerable global fame, so they gain popularity by constantly building "spectacular buildings".

But this requires continuous large-scale investment, most of which is obtained through financing...

It can be said that in recent years, construction sites in Dubai have been bustling all over the city, and many projects are dubbed "the world's highest" or "unique in the world". Projects with investments of over 100 million US dollars are everywhere, and many projects have investments of tens of billions or even hundreds of billions of dollars.

For example, the ultra-luxury Atlantis Hotel on the Jumeirah artificial island of Palm Island cost as much as $15 billion to build, and the cost of its opening ceremony alone was as high as $2000 million...

定于2010年1月完全落成的“迪拜塔”预计花费80亿美元，棕榈岛计划耗资140亿美元，“迪拜乐园”640亿美元，更雄心勃勃的朱迈拉新城计划“烧钱”950亿美元。

According to statistics, Dubai has spent as much as 1000 billion US dollars on engineering projects in recent years, while the World Bank estimates that the reconstruction funds for the entire Iraq are only 530 billion US dollars.

One-fifth of the world's cranes are in operation here, and a total of 25 construction workers work here.

In order to develop these projects, the Dubai government and its affiliated development companies borrowed heavily in the global bond market to raise investment funds, or operated subsidiaries through Dubai Holding to be listed on the Dubai International Financial Exchange and issue corporate bonds. International funds also flowed frantically to this region in pursuit of profits, and the Dubai authorities' real estate market system and supervision were also not sound, which led to the real estate market being out of control for a time.

According to reports, to buy a property in Dubai, you only need to pay a deposit, and to buy a pre-sale property, you only need to pay a down payment of 5%-10%. This became a common sales method during the peak of Dubai's real estate bubble.

Many people who invest in real estate in Dubai have never seen a ready-made house. They only need to look at the blueprints and pay a deposit of 5000 to 10000 dirhams, and then resell it to the next buyer within half a month. Once they know that a real estate company has launched a project, many people will try to grab a house number, and some even queue up overnight to get a number. Those who get the number can make money by selling the number. They can earn 10 dirhams (equivalent to 18.6 Chinese yuan) for one number.

Driven by this crazy investment enthusiasm, housing prices in Dubai have skyrocketed, nearly quadrupling in less than ten years.

The real estate bubble kept getting bigger and bigger, and finally it burst, and the crisis occurred.

(End of this chapter)