TODAY Online : Dubai debacle a taste of things to come

Dubai debacle a taste of things to come

05:55 AM Dec 03, 2009

by Loh Chee Kong

SINGAPORE - The Dubai financial crisis would be the first of many to come as the global economy undergoes a painful transition, warned Financial Times associate editor and chief economics commentator Martin Wolf.

Speaking yesterday at a seminar organised by the Singapore Institute of International Affairs, Mr Wolf pointed out that it was only a matter of time that Dubai- "essentially a very large commercial real estate" - ran into credit problems.

"(The banks) lent to everybody in every conceivable way," said Mr Wolf, "We are still very much at the beginning stage of working through the full implications of the bad lending that occurred in the Great Credit Boom."

Still, Mr Wolf noted that the US$26 billion ($35.9 billion) debt incurred by Dubai government's investment arm Dubai World "seemed almost trivial" compared to the losses that hit government-sponsored companies in the United States at the onset of the global financial crisis.

Doubting Asia's ability to replace the US as the world's chief consumer - particularly in China where a large proportion of corporate profits do not flow down to the average households - Mr Wolf reiterated that prospects for the global economy remain bleak.

And "serious inflation" could set in "seven, eight" years - as the US government deals with a burgeoning fiscal deficit. Said Mr Wolf: "There are just two ways out of it: Close the fiscal deficit dramatically whatever it costs ... big tax rises, big spending cuts. Or they go to the Central Bank and they'll say this is what you are for, buy the (treasury bonds)."

Mr Wolf also dismissed the notion of an era of Asian dominance. The idea that Asian countries such as Japan, India and China could cooperate "so closely as to run the world to the exclusion of the West strike me as one of the higher fantasies", he added. Loh Chee Kong