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Margaret Warner talks to economic expert Simon Johnson about how Dubai's weak economy will affect the rest of the world.
For this week, the Dow lost one-tenth-of-a-percent; the Nasdaq fell four-tenths-of-a-percent. Margaret Warner has more on all this.
And for a closer look at the Dubai story, its implications and the connection with the financial crisis, we're joined by an expert we have often turned to in these matters. Simon Johnson is professor at the Sloan School of Management and senior fellow at the Peterson Institute. He is a former chief economist at the International Monetary Fund.
And, Simon, welcome back.
So, first, briefly explain, what is Dubai World? Is this a private company or is it essentially the Dubai government?
It's a state-controlled company and state-owned, as far as we know. But it is not the state. It is not the sovereign.
So, it is possible that Dubai World could default on its debts, for example, and that wouldn't be a default by the Dubai government.
So, why can't Dubai World pay its debts? What is it, $60 billion?
It's a property company, by and large. And as far — it owns properties around the world, by the way, but the — the real money that they have spent and the money that they have lost, I think, at this point, is in Dubai.
They have built extravagant, amazing properties, which we just saw in the news report. And many of these properties are vacant. They aren't generating any income right now. And I think they have just run out of cash.
Well, is Dubai in worse shape than other places? I mean, there are other places around the globe where property values have fall 25, 30, even 40 percent. But we haven't seen, have we, anywhere else a government-related entity like this essentially saying they can't pay?
Well, we have seen some other spectacular collapses, of course, such as Iceland last year, and some more…
Well, yes, right away.
Countries in the Baltics, for example, most of Eastern Europe is very much still in trouble.
But, of course, what is striking about Dubai is that it is in the oil-rich part of the world. Oil prices are pretty high, close to $80 a barrel today.
And what we are looking at is a very strange relationship between Dubai and Abu Dhabi, which is part of United Arab Emirates, and has an enormous amount of money, maybe $800 billion, perhaps more, in cash, liquid assets outside the country. Dubai's debts are big, but very small compared to what Abu Dhabi has. So, how are they going to sort this one out?
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