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The Limits of Dubai

Cambridge – Global investors are in a giant huff over Dubai’s decision to allow its flagship private company Dubai World to seek a six-month standstill (implying at least partial default) on payments on some $26 billion in debt. What exactly did investors expect when they purchased bonds in companies with names like “Limitless World,” one of Dubai World’s bankrupt real-estate subsidiaries? Talk about a bubble mentality.

The idea, I guess, was that the emirate’s government would stand behind every loan, no matter how risky. And if the oil-poor Dubai government didn’t have the money, then somehow its oil-rich sister state Abu Dhabi would cough up the cash.

An absurd expectation, one might think. But it is hardly more improbable than many of the other massive bailouts we have seen around the world in the wake of the recent financial crisis. What really upset investors, of course, was the realization that, yes, some day untenable debt guarantees will have to be withdrawn. Eventually, an over-leveraged world is going to have to find a way to cut debt burdens down to size, and it won’t all be pretty.

There are those that revel in what they see as a come-uppance for brash Dubai’s outsized ambitions. I, for one, do not share this view. Yes, Dubai, with its man-made islands, hotels simulating Venice, and roof-top tennis courts, is a real-world castle in the sand. Yet, Dubai has also shown the rest of the Middle East what entrepreneurial spirit can accomplish.