Dubai has for some time been associated with lavish riches and a growing economy. However, the image of a flourishing Dubai is slowly fading as the emirate falls deeper into debt. Last Sunday, Sheikh Mohammed bin Rashid al-Maktoum flew to London to discuss the effects of the global economic downturn on Dubai’s growth with the Queen, Gordon Brown and Lord Mandelson.

Since the four years that he has been ruler, the financial climate has drastically changed from an admiration of the economic growth that had fostered Dubai to anger and fear that British contractors and investment groups would not get paid. And in his effort to reassure investors that they would get paid, Maktoum also knew that there was a bigger test in international relations still brewing

The crisis began on Wednesday, the eve of the Eid religious festival, when the Dubai government announced that one of its main investment vehicles, Dubai World, could not pay its bill. And like over-leveraged companies that are exposed by the recession, Dubai had basically borrowed beyond its means. And the threat of a bankrupt government is on everyone’s mind.

The Bank of International Settlements claims British banks had advanced $50 billion to the United Arab Emirates, of which Dubai is a part. Now HSBC, Standard Chartered, Barclays and RBS are among the most exposed. Abu Dhabi, the other dominant mini-state, has assured that it will help its neighbor but on a “case by case basis.” Which can go either way, however it is clear they aren’t very enthusiastic about helping.

It is no surprise that the crisis would happen. After Dubai’s property boom, where some of the world’ most expensive hotels had been built (like Palma Deira), and Dubai World’s property subsidiary, Nakheel, branded Dubai as a luxury Mecca, the projects are being abandoned and the effects hold serious threat to Dubai’s role as a financial center. A few years ago all hope was on the growing Emirate’s and investors gladly gave to build lavish financial buildings, hotels and even small chains of islands. Dubai was admired for its efforts to turn the area into a financial and tourism hub from their shortening supply of oil.

As for now the world is holding its breath, will the banks and investors get their money? Already Dubai’s quick and fervent actions to acquire property, build its portfolio and become a financial center to rival that of New York and London is falling apart as quickly as it came together-a good lesson to be learned on finance.

Via: The Times