Last Friday the markets thought that the potential credit defaults on 60 billion dollars was a big deal. On Monday, it all of the sudden wasn’t such a big deal. Let’s take a look at the situation and draw some conclusions.

The problem started when Dubai World, a government owned investment company, announced that they wanted to forego paying the interest on roughly 60 billion dollars of debt while they seek a way to restructure it. In other words, there is trouble in the world of Dubai.

The Central Bank of the United Arab Emirates stated that they would help out some of the local banks but that they would not be bailing them out. So, what is going to happen with the 60 billion dollars of debt? This is where Abu Dhabi comes into the picture.

Abu Dhabi is the second largest city and the capital of the United Arab Emirates Government. They control roughly 7% of the world’s oil reserves making this area an extremely wealthy one. Abu Dhabi is extremely connected to Dubai and cannot afford this debt to go into default. This is especially true since they are also acting as a creditor in some cases to Dubai. Thus they will probably be forced to bail Dubai World out. Regardless, there could be some real problems in the credit markets. However, it would probably be on the strictest of terms.

So then, what is the problem? The problem comes in not knowing what else could go wrong or is wrong. Is this the smoke from a larger fire we are not seeing? Is this the kick-off of debt crisis 2? It is always the unknown in a debt crisis that can end up being the problem.

Dubai was a booming region. They were very extravagant in their building of outrageous projects and spending and borrowing huge sums of money. They built man-made islands in the shape of palm trees. They developed outrageous projects like the worlds only indoor ski resort. They have also built the world’s largest building which will open in a matter of weeks. Ironically, the Empire State building which at the time was the world’s largest building opened amidst the worst bear market on record and during the Great Depression.

Dubai World would make claims that investors should expect high returns. Their slogan is that the sun never sets on Dubai World. Well it appears that nighttime is fast approaching. Maybe their newest slogan should be pride comes before a fall.

This seems to be another example of the dark side of arrogance and greed. Now the world’s financial markets wait to see the real fall-out from this situation. It is always what the market doesn’t know that becomes the problem.

Tags: Abu Dhabi, Bailout, Bob Brooks, Debt, debt crisis, Dubai, Dubai World, Great Depression, United Arab Emirates