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First with Financial Comment from Arabia

Abu Dhabi puts up $10bn to meet Dubai debt call

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Dubai World bonds maturing today have been bailed out by $10 billion in new funds from Abu Dhabi, averting an impending default. Markets immediately rallied on the news which was completely unexpected.

An emailed statement early this morning said Dubai will use the money to pay the $4.1 billion Nakheel bond maturing today and ‘trade creditors and contractors as well as to meet interest expenses and company working capital through April 30, 2010, conditioned on the company being successful in negotiating a standstill as previously announced’.

Bankruptcy law

The Dubai Government also said it would be announcing a ‘comprehensive reorganization law, a framework that is based upon internationally accepted standards for transparency and creditor protection. This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations.’

Quite why it took such extraordinary market brinkmanship before Abu Dhabi decided to step in we will probably never know. The intricacies of inter-tribal politics are usually not revealed outside the inner circle.

That is bound to leave room for speculation about what happened. The immediate debt crisis is, however, averted and Abu Dhabi has after all stood by Dubai and underwritten its debts. Stock markets in both UAE cities rebounded strongly on the news, although GCC stocks recovered by much less from recent sell-offs.

Dubai debts

But while $10 billion is clearly enough to plug the hole in Nakheel’s finances, this is not the end of the Dubai debt story. Goldman Sachs estimates the total debt to be around $120 billion, twice the GDP of Dubai for 2009 which it reckons will be $60 billion, down from $80 billion in 2008 due mainly to the collapse of the real estate boom.

It might also strike some observers as odd that while the Dubai Government washed its hands of Nakheel as a limited liability corporation, Abu Dhabi nonetheless ultimately felt obligated to take responsibility for Nakheel’s debt.

Abu Dhabi very rich

The obvious inference is that Abu Dhabi felt that the damage to the collective reputation of the United Arab Emirates was going to be too high. Certainly if you have a $650-700 billion sovereign wealth fund then shelling out $10 billion to keep a reputation intact is a reasonable investment.

Quite what global finance and the international media will make of today’s news will be interesting to watch. The siren voices have clearly been exposed as ridiculous harpies with no knowledge of the UAE economic reality.

As regional HSBC CEO Simon Cooper commented: ‘This support confirms that the UAE is one country and demonstrates the strong support provided by the government of the UAE to the country’s corporate sector’.

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Written by Peter Cooper

December 14, 2009 at 11:29 am

One Response

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  1. Driving around Abu Dhabi past few weeks you could not miss the displays celebrating 38 years of nationhood. Thousands of colorful lights a meter high in the shape of “38” down most of the main routes on the island. And interspersed amongst these standards was the number 7. My wife and I took a few minutes to work it out, what on earth does the 7 stand for – Khalifa’s favorite lotto number?

    It was Abu Dhabi demonstrating solidarity with the other 6 emirates of the UAE, the nation that the former Sheikh Zayed worked so hard to build. No-one in his family would disrespect his memory by compromising his work, not backing another emirate in time of need is one such example.

    There will however be a very high price for Dubai to pay for the loss of wasta.

    Nigel

    December 14, 2009 at 4:34 pm


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