When Abu Dhabi agreed on Monday to provide Dubai with $10 billion to settle some of its debt obligations, it may have temporarily soothed the concerns of major creditors. But the bailout, and a separate move to set out a legal framework for further debt restructuring, won't do much to relieve Dubai's long-term debt problems.
Plenty of questions remain as Dubai works to repair its reputation and tries to renegotiate the rest of its debts. The full extent of its liabilities is uncertain, but Dubai's known debts are roughly equal to its total economic output last year, with some analysts estimating its total obligations at $100 billion or more, Bloomberg News reported.
"It's not going to stop and go away," John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh, Saudi Arabia told Bloomberg. "There's still debt that needs to be settled in 2010 and 2011."
Dubai must repay at least $55 billion in the next three years, according to Goldman Sachs Group Inc. (NYSE: GS).
In November, Dubai shook the financial world when it announced a six-month standstill on about $26 billion of debt for its chief investment arm, Dubai World.
About $4.1 billion of the bailout from Abu Dhabi will be used to make a debt payment on an Islamic bond, or sukuk , for Nahheel PJSC, the Dubai World unit that's building palm tree-shaped islands and a map of the world off the emirate's coast.
The rest will help meet Dubai World's costs as it negotiates with creditors to get short-term relief from its debt obligations under the terms of a new law in which lenders could pursue asset sales or other actions designed to get their money back.
Abu Dhabi, which controls the UAE's presidency, has directly and indirectly provided Dubai with $25 billion over the past year, mostly by buying Dubai bonds. News of the bailout sent stock markets in both emirates soaring.
But the latest rescue also raised doubts about the nature of the relationship between Abu Dhabi, the capital of the U.A.E., and Dubai, its financial hub.
Abu Dhabi and Dubai are the two biggest emirates of the United Arab Emirates. But Abu Dhabi controls 8% of the world's oil and has one of the world's richest sovereign wealth funds. Meanwhile, Dubai – which has almost no oil – has used debt to transform itself from a small fishing village into a global business hub.
Dubai launched Dubai World to broaden the depth of its economy and bolster its international ties. During the boom years, Dubai World accessed easy credit to gain significant footholds in businesses ranging from international seaports and real estate, to tourism and retail.
Nakheel, a property developer and hotel operator, was among those Dubai World companies that relied heavily on easy credit. But as the worldwide economy tanked, Dubai struggled to repay it debt.
Because Abu Dhabi and Dubai are both members of the U.A.E., investors believed that Abu Dhabi would back its operating companies, including those in Dubai.
"What Dubai has is for Abu Dhabi and what Abu Dhabi has is for Dubai," because the two sheikhdoms "are one and we will stay as one," Dubai's head, Sheikh Mohammed bin Rashid Al Maktoum, told investors at a Bank of America Corp. (NYSE: BAC) conference in November, Bloomberg reported.
But even though that relationship was rarely spelled out in contracts, it was taken for granted by the banks that lent Dubai billions to fund Sheikh Mohammed's projects, said Chris Turner, a former director of risk and asset management at Istithmar World, Dubai World's investment arm.
"It was just a general assumption," Turner told Bloomberg TV on Dec. 8. "It's how business is done in Dubai. One does not push the government for specific pieces of paper."
Dubai World officials will meet with bank lenders this month to agree on the details of the standstill. If a deal with creditors can't be reached, the new law announced Monday provides the banks a rough outline for a legal system of arbitration for recovering funds.
The law establishes a panel of judges who would preside over debt and corporate-restructuring disputes, Dubai said.
Even though the law is untested, Simon Cooper, the chief executive of HSBC Holdings PLC (ADR NYSE: HBC) Middle East operations told The Wall Street Journal the new funding and law would be welcomed by financial markets and "confirms that the United Arab Emirates is one country."
Among current or recent Nakheel sukuk investors identified by The Journal are New York hedge funds QVT Financial LP, D.E. Shaw & Co. Vicis Capital LLC, as well as money managers BlackRock Inc. (NYSE: BLK) and Ashmore Group PLC (LON: ASHM).
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