Dubai in trouble

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MARCO WERMAN: I'm Marco Werman. This is The World. Shoppers are turning out in strong numbers today for the start of the holiday season, but cloudy economic skies hover over this Black Friday. Unemployment is high, credit is tight, and most investors have less money today than they did yesterday. The Dow Jones industrial average dropped 154 points to close at 10,310. Wall Street may have been reacting to financial trouble in Dubai. That's the semi-autonomous city-state that's part of the United Arab Emirates. The World's Alex Gallafent begins our coverage.

ALEX GALLAFENT: You may have heard about some of the things that made Dubai famous as a kind of Disneyland for grown-ups. The indoor ski dome in the middle of a desert, the tallest tower in the world, the biggest man-made islands. These were all part of a program of colossal spending in Dubai, but it wasn't paid for with oil money. Dubai's wells are dry. Matthew Martin is editor of the Middle East Economic Digest.

MATTHEW MARTIN: A lot of the massive growth that we've seen in Dubai over the past few years has all been fueled not directly off the government balance sheet but by taking on debt from the capital markets.

GALLAFENT: The company at the center of the current crisis is facing the consequences of that approach. That company is Dubai World. It's a real estate group backed by Dubai's government, and it's one of the prime movers in the city-state's explosive growth. But Dubai World has racked up almost 60 billion dollars worth of debt. This week the company asked creditors if it could postpone repayments on that debt for six months. Christopher Davidson is the author of Dubai: The Vulnerability of Success. He says Dubai World's troubles are the result of a broader economic strategy in the emirate.

CHRISTOPHER DAVIDSON: What we've seen in Dubai is trying to build an economy that's been aimed at bringing in foreign direct investment to keep it in a desert creating a sponge like economy to bring in wealth from the region, from Britain, America, anywhere that wants to invest in real estate. And this really has been tinkering with Dubai's historical success as a port economy, a place where money passes through and goes somewhere else. But really, the last few years has seen a shift in the focus of the economy, and that's really what's been its undoing.

GALLAFENT: The global economic crisis exposed Dubai's flawed business model. Real estate prices plummeted after years of flying ever higher. Foreign investment slowed down. Mahmood Nadi is a Jordanian mechanical engineer who has worked in Dubai for two years. He says you can see the emirate's problems in its glittering collection of high-rise buildings.

MAHMOOD NADI: Almost fifty percent not finished yet, thirty percent still not occupied. You can say twenty percent are occupied, from the new high-rise buildings. The situation is really not stable.

GALLAFENT: Indeed, Dubai has a skyline bought on credit, and Christopher Davidson thinks creditors are unlikely to accept Dubai World's request to postpone its debt repayments.

DAVIDSON: For the last several months, there have been a number of international companies that have been owed sums for labor and construction work they've conducted in Dubai. They've been rather quiet and polite about that hoping the good times will return, but I think now we'll get to the stage where lawsuits will be pressed on the government of Dubai.

GALLAFENT: Dubai will probably look to its neighbor for help. That's Abu Dhabi, another part of the United Arab Emirates. Unlike Dubai, Abu Dhabi does have oil. In February, it bought 10 billion dollars worth of bonds from Dubai. Many saw that deal as a bailout, but it's not clear when or at what price Abu Dhabi would come to its neighbor's rescue again. That uncertainty propelled today's market worries. Another concern of investors is the lack of detail about how Dubai's proposed debt rescheduling would work. But British Prime Minister Gordon Brown predicted today that Dubai's problems will not set off a second global economic meltdown.

GORDON BROWN: If this is a localized problem, then it can be dealt with, and I believe that that is the case. And I believe that this is one of things that we will see over the next few months as the world economy returns to growth, but it is an event that can be dealt with.

GALLAFENT: That's a hope investors in the United States most likely share. For The World, I'm Alex Gallafent.