If Dubai World can have a debt crisis, could Dubai? And if Dubai, what about, Greece? And if Greece ... what about Britain?
To start at the beginning of this chain, the possibility that the state-owned Dubai World might actually default does not mean that the state of Dubai will. Dubai’s finance chief yesterday cut Dubai World loose, mocking creditors who thought the company was part of the Government. This makes it less likely that Dubai itself will default on its roughly $20 billion (£12.2 billion) debt.
The Dubai scare has focused investors’ minds on the risk of defaults by other governments running up big deficits, such as that of Greece.
Greece has higher debts than Britain and no safety valve in devaluation. But some economists are now forecasting that Britain could face a debt crisis next year. Morgan Stanley analysts suggest that, if there is a hung parliament, investors will worry about Britain’s ability to tackle its mounting debts. It could lead to capital flight, a sterling slump, a sell-off of government bonds and a rise in interest rates that could threaten economic recovery.
This outcome still seems unlikely. But, with investors increasingly nervous, it is all the more important that Alistair Darling comes up with a credible plan for reducing the deficit in next week’s Pre-Budget Report.