Global markets are reeling from news that Dubai World, the investment arm of Dubai's government, is seeking to suspend payments for its massive debt. Dubai, once seen as the Middle East playground for the super-wealthy, appears unable to support its breakneck construction and infrastructure projects. Bloomberg News reports it could owe as much as $80 to $90 billion. Will financial markets on Wall Street as well as Europe and Asia recover or will Dubai's descent drag them down? How worried should we be about Dubai?
Isolated Incident, The New York Times's Paul Krugman argues. "[Y]ou can see this as basically just another commercial real estate bust. Either you view Dubai World as nothing special, despite sovereign ownership, as Willem Buiter does; or you think of the emirate as a whole as, in effect, a highly leveraged CRE investor facing the same problems as many others in the same situation. Finally, you can see Dubai as sui generis. And really, there has been nothing else quite like it."
Disaster Averted? Time's Justin Fox urges calm. "As of this morning, things are already calming down a bit. Some Asian markets were down sharply overnight, and U.S. stock markets started the day 2% down. But European markets, which took the brunt of the hit yesterday, are up on the day," he writes. "A return to the indiscriminate panic of last fall would be really bad. A move toward a more skeptical attitude toward risky assets, in which investors feel compelled to do more work to sort out the dodgy from the relatively safe, would be a really healthy development. So far I think we're getting the second reaction."
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