More fundamentally, Dubai’s wobble raised the spectre of a sovereign default. Dubai’s government is not technically on the hook for Nakheel’s debts. But the government’s hesitation in saving its national champions nonetheless demonstrates its fiscal limits.
These wider fears are easy to exaggerate. Despite its self-aggrandisement, Dubai is not yet important enough to bring down the global financial system. Its troubles moved markets last week partly because so many traders were on holiday. Other investors were looking for cues to sell after the long rally in markets since the spring. By Monday November 30th, the principal stock indices were shaking off the dust and venturing upwards again.
But the damage Dubai has done to itself is no passing storm. An emirate that has spent so much money and hired so many flaks to cultivate its image and inspire confidence saw much of that work undone in a single 200-word statement announcing the debt standstill.