As we suggested just a few days ago, the Abu Dhabi authorities have flown to the rescue of Dubai with confirmation of a $10 billion bailout loan. The funds will be used to repay a $4.1 billion Nakheel Islamic bond which was due for repayment on 14 December and the additional funding will cover finance and interest costs while the authorities continue their quest for a restructuring of the state’s substantial debt.
However, while it has taken three weeks for the Abu Dhabi authorities to step forward this is not a “done deal” and the Abu Dhabi authorities have been vocal in their belief that all parties involved, including banks, need to share the pain of the problems in Dubai. So what will happen next?
The situation so far
Despite the fact that the Dubai authorities attempted initially to wash their hands of debt issues with regards to Nakheel and other state-controlled companies, they were in the end forced to admit there was some liability for the state. However, with money tight to say the least and the economy in freefall there were very few third parties willing or able to lend money to Dubai in the short to medium term.
There has been speculation for the last few weeks that the Abu Dhabi authorities were looking to put together a comprehensive rescue package although in the end, at least at the moment, this particular package has been watered down somewhat.
Why did the Abu Dhabi authorities act now?
In many ways the Abu Dhabi authorities were stuck between “a rock and a hard place” because the ongoing demise of the Dubai economy was impacting upon the region, both its reputation and its deemed credit worthiness. If you think of the Dubai debt issue as a stone thrown into the pond which is the worldwide money markets, the ripples were starting to hit all corners of the market and we did see a short-term increase in the cost of debt.
As a consequence, the Abu Dhabi authorities were in effect forced to come forward with a rescue package although quite cleverly they have also turned the tables on those banks who loaned the rumoured $80 billion to the Dubai authorities. In many ways this has been a classic piece of timing by the Abu Dhabi authorities, stepping into the fray just as concerns were starting to mount again and the Dubai authorities had been forced to “come clean”.
Is the $10 billion bailout enough?
While there are various ongoing debt issues in Dubai, with Nakheel and its parent company Dubai World in talks to suspend payments on $26 billion of debt, there are potentially more issues to come in the short to medium term. It is believed that the Dubai authorities have built up a debt mountain which could be as high as $80 billion, used primarily to improve the economy and infrastructure of Dubai, and they are struggling to find the money to cover short to medium-term repayments.
As a consequence, the $10 billion bailout by the Abu Dhabi authorities is nothing but an opening shot in a long-term game of cat and mouse between the Abu Dhabi authorities and the banks which were happy to fund the Dubai “investment explosion” only a few years ago. This initial payment gives the Dubai authorities some breathing space, more power in negotiations and ultimately should be seen as a warning to the financial sector that, similar to the situation in the UK, it cannot take large scale risks and expect to be bailed out by governments around the world.
Is this the end of the problem?
Those who believe that the Dubai debt issue is over may well need to think again because this is literally just stage one in what will become a carefully stage-managed rescue programme for the area. The truth is that neither Abu Dhabi, or other neighbouring states, or the worldwide money markets can afford to see Dubai collapse because this could signal the end of “capitalism” in this particular area of the world.
Prior to the debt issues in Dubai the state had been put forward as the perfect example of capitalism being used to effectively build a whole new business arena, attracting significant interest from property companies, property investors, overseas companies and expats. While this new “business arena” did not spring up overnight, and was a carefully scripted plan by the Dubai authorities, it is a model which could potentially be used by other countries around the world.
The next few weeks will see negotiations between the Dubai authorities, the Abu Dhabi authorities and the various banks which have “invested” money into Dubai. We will no doubt see a variety of threats and promises, confidential leaks and more concern in the worldwide investment markets but ultimately there are many parties who cannot afford to see Dubai fall by the wayside and in the end there is every chance that an “amicable” agreement will be reached.
However, those who believe the path forward for Dubai from here onwards will be smooth could well be disappointed because there are many banks, investors and governments who would like to “teach the Dubai authorities a lesson” in fiscal management and risk-taking. A collapse of Dubai would have implications for the worldwide investment and worldwide money markets and inevitably place more pressure on government budgets and national debts around the world.
While there are those who believe that the Abu Dhabi authorities should have stepped in at an earlier stage, in many ways their timing is perfect because they have “saved the day” yet also turned the tables on worldwide bankers who were happy to fund the Dubai project from day one. By insisting that everybody needs to “share the pain” the focus has been taken away from any potential mismanagement by the Dubai authorities and placed fairly and squarely at the door of investors and bankers who were willing to take, what in hindsight were, large risks with the Dubai authorities.
However, the truth is that once the memory of the Dubai debt issue has faded into the memory of bankers and investors we will no doubt see similar situations arising in the future, time and time again.