Many years ago, during the height of the cold war, there was a popular theory - mutually assured destruction. If you sink, so will everyone. Others had no choice but to keep you alive. Years later, the theory has mutated to a financial version - Too Big To Fail. We saw it being played out when governments had no choice but to bail out financial institutions during the meltdown. We are seeing that again with the Dubai bailout.
Abu Dhabi, the richest member of the UAE has agreed to bail out neighbouring Dubai. At the last minute. After all, it couldn't let Dubai default without harming its economic interests. Abu Dhabi has provided the Dubai government with US$ 10 bn. That's enough to pay the US$ 4.1 bn due immediately but less than the total debt. As per the New York Times, Dubai World (real estate arm) still owes about US$ 18 bn, Dubai Holding (investment arm) owes US$ 8 bn, the Investment Corporation of Dubai owes US$ 26 bn and the Dubai government itself owes US$ 16.3 bn. What about these remaining creditors? We believe they will also have to show some flexibility while dealing with a sovereign state. Too Big To Fail, you see.
The lesson in all of this - if you decide to borrow, borrow big time. The smaller fry is taken to task, borrowers who are Too Big To Fail are bailed out. Not that it is the right thing to do. We certainly don't believe in it. But it appears that this logic is working. Let's see for how long.
