Global General

Dubai debt meltdown - another financial crisis?

(Xinhua)
Updated: 2009-11-29 21:50

Markets: correction or erosion

As consequence of the debt woes, crude oil prices experienced the deepest slump on Friday since January. Meanwhile, property prices in Dubai almost downed by half. Wall Street retreated amid a global sell-off as investors fled risk assets.

Some saw that the market was overheated this year and the debt crisis was just a trigger for market correction.

Mohamed El-Erian, chief executive officer of the US Pacific Investment Management Co., said Friday that the troubles in Dubai served as a catalyst for "overdue correction" in stocks and other risk investment market that has been depending on liquidity injection.

"While many have acknowledged in the last few weeks the growing wedge between market valuations and economic and corporate realities, few have been willing to take their equity exposure down," El-Erian said.

In tackling the global financial crisis, countries across the world were keeping low interest rates and substantial liquidity in their financial sectors. Nonetheless, property bubbles were simmering behind these seemingly well-performed markets.

The view was supported by Templeton fund manager Mark Mobius, who predicted that the Dubai crisis might trigger a 20-percent stock contraction on emerging markets.

As real estate market accounts for a large part of Dubai's economy, some observers warned that the crisis could bear large on its economic well-being.

Richard Bove, a veteran banking analyst at the US Rochdale Securities, said that Dubai would probably sell its good real estate at a low price and cause a chain reaction in the whole market.

Figures form the London-based Deutsche Bank showed that house prices, both commercial and residential, have halved since August last year.

Despite Dubai World's pledge to mitigate the risks for its investors, the losses in its real estate and stock market would make it hard to have the promise delivered.

Analysts from the Bank of America cautioned that if the Dubai crisis spread to other emerging markets, the world economic recovery could see a major setback.