Dubai has had its mantle of most interesting sovereign debtor taken from it this week by countries in Southern Europe. There are some interesting similarities and differences between these two regions and I think it makes sense to discuss them comparatively. It also gives me a chance to branch out from talking about Dubai so exclusively.
Greece and Dubai have come to their problems differently. Dubai borrowed a massive amount of money to finance the construction of major infrastructure projects inside the Emirate as well as to buy international trophy assets. The implementation of the construction projects probably involved a lot of siphoning off of funds by Emirate merchant families thus the actual value that went into them was less than was borrowed. With the onset of the international financial crisis the earning power of those assets is now substantially less, and in the case of real estate spectacularly less, than when the money was lent leading to the threat of default. Additionally the prices of the international trophy assets have all declined.
The Greeks have run into problems because even before the crisis began they were running a fairly substantial budget deficit and as a result piling up substantial debts. The structural issues with the Greek deficit can be found in many EU countries but they are a worse in Greece. There is a substantial welfare state as elsewhere in the EU but the rule of law is also weaker and there is widespread tax evasion or avoidance. There are also strong unions in the public sector which make it difficult for the government to rein in spending. These issues were exacerbated by the financial crisis. Government outlays for unemployment and stimulus increased but also tax revenues declined. International maritime shipping isa major industry in Greece and has been particularly hard hit by the declines in international trade.
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