The steady stream of encouraging economic news from almost every part of the world over the last six months had led most governments and observers of the global economy to believe that the world had firmly seen off the crisis that struck when Lehman Brothers went down last September. Now, that calm has been shattered by the news of Dubai World, a large sovereign fund wholly owned by the emirate of Dubai, suspending the repayment of all its debt for six months. Interestingly, Dubai (one of the seven kingdoms which comprise the United Arab Emirates) has no oil reserves and therefore no petro-dollars to bail itself out of this difficult situation.

Dubai is quite simply a gigantic exercise in real estate development — big malls, fancy homes, seven star hotels, luxury islands are what you would most commonly associate with the once-upon-a-time fishing village and desert city. While the going was good, the city was able to attract the interest and deep pockets of the world’s elite, making it a city of boom particularly over the last decade. But at some point, like all over-exuberant real estate development, this one too was bound to have an unhappy ending, Dubai World, through its real estate arm Nakheel, was heavily invested in the property and building business in Dubai. The global crisis would have inevitably squeezed the pockets of those who were buying all the glitzy properties in Dubai. Hence overcapacity was always going to be a problem. Finally, more than a year after Lehman went down, the evident overcapacity in real estate showed up and has effectively bankrupted Nakheel, Dubai World and Dubai.

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