Here’s essentially what caused Dubai’s debt extravaganza to finally come to an end.
Far too much easy money flowed into Dubai during previous years, fueling a massive construction boom financed with debt. For a while this debt looked sustainable to those involved because it was ostensibly backed by valuable property.
Yet when the global financial crisis hit, property prices fell in many parts of the world. Dubai property prices were hit especially hard.
As shown below by the skiing Emirati, Dubai property rates per square foot fell 45% from Q3 2008 to Q3 2009 according to Colliers International.
Thus just as many American’s went underwater on their mortgages due to the American property crisis, owing more to the bank than their house was worth, the same thing basically happened to the Nakheel property business of the Dubai state-owned conglomerate Dubai World.
Combined with near-term cash flow constraints, this finally forced Dubai World to admit to its creditors that it would not be able to meet all of its debt obligations.
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