So was it all a sandstorm in a teacup? That is the question some traders are quietly asking right now. Last week, global financial markets were tipped into panic on the news that a bond issued by Nakheel, the property group linked to Dubai World, the quasi-government entity, might be pushed into effective default.
But this week markets partially recovered after the authorities in Abu Dhabi indicated that they were prepared to support banks in the United Arab Emirates – a move that prompted hopes this largesse may yet be used to bail out a clutch of Dubai entities too.
But even if Abu Dhabi did eventually rescue entities such as Dubai World, which remains a big “if”, the episode is likely to leave an unpleasant aftertaste for global credit markets. If nothing else, the Dubai saga has reminded investors how uncertain creditor rights can be, even in countries with a veneer of the capitalist ethos. This uncertainty could have a corrosive effect on global market confidence in the coming months, particularly given the sheer scale of deleveraging that needs to take place around the world – including Dubai.
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