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Getting a sense of proportion on the Dubai debt crisis

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Now that the dust has settled on the last minute repayment of the Nakheel bond with funds from Abu Dhabi last month, thereby averting the immediate Dubai debt crisis, commentators are still struggling to get a sense of perspective on the whole issue of the Dubai public and quasi-state debt, variously estimated at $80-120 billion.

Not that the problems of the Dubai World property subsidiaries Nakheel and Limitless are over. Far from it, there is a $22 billion unilateral debt standstill to be resolved by May. That means the creditors for this huge sum will not receive payments of interest or principal until the debts are rescheduled, a process that could also involve an agreed reduction in the principal in order to secure repayment of the balance.

Hardball negotiations

These will understandably be delicate negotiations, and the potential for either side to play hardball could lead to another crisis situation. So the debt rescheduling issue hangs over the local banking sector until it is resolved, assuming it can be, otherwise the Dubai Government has quickly enacted legislation that will allow for the liquidation of Nakheel and Limitless.

However, local commentators are trying to get a sense of proportion by seeing the debts of Dubai state entities in a global context. Compared to US or UK public sector debts of $13.7 trillion and $9 trillion respectively this is true. Remember a trillion is a thousand billion.

An even better comparison is to see the Dubai debt in the context of total UAE assets. At current prices UAE proven oil reserves are worth $8.5 trillion and the sovereign wealth fund is estimated at around $600 billion, not to mention the multi-trillion dollar annual oil account surplus.

Cash flow issue

In the UAE context the Dubai debt crisis is like a wealthy person not paying their credit card due to a cash flow issue and asking for more time to pay. They might have some embarrassment in having red ink on their account but they remain just as rich as ever.

However, this wider context is also a distortion, even if it helps to get a sense of proportion. The reality is that the Dubai debt problem is concentrated into a number of state-owned companies, principally in the real estate sector.

In the context of the local real estate market the sums now owed are very big. Banks are bound to ask themselves how did this happen? Who made the decisions? Why get we allow ourselves to get so carried away?

Like General Motors

But just as Chapter 11 for General Motors was not the end of Detroit, nor for that matter the USA, the debt problems of Nakheel and Limitless are not the end of Dubai or the UAE. That is where the matter became completely distorted and misunderstood, particularly by the global media, although the local media said nothing at the time.

You can even put a positive spin on this whole episode and say that while Dubai is proactively sorting out its debt position, the rest-of-the-world is behaving as though you can carry on borrowing forever without negative consequences. As the Dubai debt crisis has shown there is always a day of reckoning, and being first into a debt crisis might also mean being first out of it.

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Written by Peter Cooper

January 10, 2010 at 9:13 am

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