Abu Dhabi relent and bail out Dubai World with yet another $10bln

The words 'piss-up' and 'brewery' come to mind. First we had the stream of official announcements this year that everything was OK, of course Dubai would meet its obligations, stop criticising us, etc. Then the reshuffle at the top levels of Dubais various semi-commercial entities, followed by the shock announcement of a debt default and that Dubai would not stand by the debts of Dubai World and Nakheel, and now... they've bought some more time.

Today Abu Dhabi relented and agreed to lend the cash-stapped ruler of Dubai yet another $10bln specifically for sorting out Nakheel's Sukuk bond (due today $3.52bln + 15% interest) which will, apparently be paid in full.

Bondholders - especially those who bought the bond in the market at steep discount earlier this year - will be very happy that Abu Dhabi finally came to the rescue. I would imagine that a lot of those bond holders actually happen to live in Abu Dhabi.



Photo: Who you gonna call Sh. Maktoum?

Dubai's Sh. Maktoum naturally talked his usual schtick about Dubai being committed to being a Global Financial Leader, 'good governance' etc etc etc. (see below) Yawn. I think even those that still think Sh. Maktoum a financial genius and visionary must get uncomfortable with the unrelenting bullshit he pumps out in direct contradiction to the facts. (Orwell would love Dubai).

Dubai has realised it at minimum needs a comprehensive corporate Bankrupcy law (although the Dubai Government are calling it a "reorganisation law") to enable creditors to at least know what the minimum rules are. A personal bankruptcy law would also be a tremendous improvement.

So in the past 12 months Maktoum has got $25bln from Abu Dhabi, probably borrowed long term at around 4%. And there will be haircuts required by some creditors no doubt. But big brother obviously was worried about the impact the sudden default announcement had caused on the wider UAE economy and their own aspirations: shares down heavily, several country's Governments complaining about Dubai's other billions in unpaid bills to their contractors [Japan, UK, Turkey, Greece, US,...], plus obvious embaressment at the GCC conference (on-going in Kuwait) with the Dubai crisis causing all the regions' Governments to experience more expensive borrowing costs and tightening credit lines. Everyone must have been asking Abu Dhabi to get a grip. As Maktoum himself said today:

...Recently, Dubai World announced that it might not be able to commercially support its obligations. Since that time, the Government of Dubai has worked closely with the Abu Dhabi Government and the UAE Central Bank addressing and assessing the impact of Dubai World on the UAE economy, banking system and investor confidence.

Dubai is now confirmed as a vassal of big brother Abu Dhabi, with Maktoum being made to learn a lesson and come to heel. Cash is king. I wonder when we'll see a merger between Etihad and Emirates...

The bailout is good news for Oman. The pressure on our own access to credit will ease, and perhaps there will be more sophistication in the market in not assuming Sovereigns will stand behind debt. Who knows, maybe Sama Dubai will even get off its arse and do something with the Yeti development.

I do wonder what's happening with the Blue City bonds... The Omanis might have noticed that defaulting on one's international obligations does not go unnoticed in the international financial community...

Extract from Statement by Sheikh Maktoum Chairman of the Dubai Supreme Fiscal Committee (published in The National)

... Today’s actions, taken together, demonstrate our strong commitment as a global financial leader to transparency, good governance, and market principles.

There will certainly be challenges periodically, just as there are challenges in other major financial centers around the globe. We believe today’s actions will best serve the interests of all stakeholders.

We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices.

Dubai is, and will continue to be, a strong and vibrant global financial center. Our best days are yet to come. The Government of Dubai remains committed to its high standards and its obligations. We are confident in our economic model, and we are confident in the long-term health and outlook for our economy.

The actions taken today are consistent with our market development, and we believe they are the actions that will best serve the interests of all stakeholders.