Abu Dhabi Caves And Pays Dubai Debts
Well there you go; it ain’t over until the fat lady sings!
The question mark of whether Abu Dhabi would cough up and cover Dubai’s gambling debts ran right up to the wire, then on “D-Day”, in this case the 14th December, the day the debt was due, a bombshell, from Reuters:
The Government of Dubai, acting through the Supreme Fiscal Committee ("SFC"), today announces a set of actions in relation to Dubai World: HH Sheikh Ahmad Bin Saeed Al Maktoum, Chairman of the Dubai Supreme Fiscal Committee said:
"First, the Government of Abu Dhabi and the UAE Central Bank have agreed to provide important support.
"Specifically, the Government of Abu Dhabi has agreed to fund $10 billion to the Dubai Financial Support Fund that will be used to satisfy a series of upcoming obligations on Dubai World.
"As a first action for the new fund, the Government of Dubai has authorized $4.1 billion to be used to pay the sukuk obligations that are due today.
"The remaining funds would also provide for interest expenses and company working capital through April 30, 2010 - conditioned on the company being successful in negotiating a standstill as previously announced.
It might be worth remarking that neither the Emirate of Abu Dhabi nor the Federal Government of the UAE was under any obligation, either legally, politically or morally to pay Dubai’s debts.
Also that technically the $4.1 billion in question was raised by a Private Shareholder Limited Liability Company, not registered within the state of the United Arab Emirates, so insofar as all the nonsense talked about “Sovereign Debt” is concerned the entity might as well have been located in Djibouti.
And even if the sukuk (a bond drawn up in line with Islamic Finance principles), had defaulted, that would have not affected the credit rating of Abu Dhabi, as PIMCO cleverly noticed, and gobbled up whatever they could buy of debt that was implicitly or explicitly guaranteed by Abu Dhabi, last week. If they played their cards right they should have made 20% on that in a week.
A default would not even have affected business in Dubai, which carried on and will carry on regardless of how many gullible bankers lend money in the region, without checking that they have secured either a sovereign guarantee or a lien on a piece of collateral that has a good chance of being worth equal to or more than the loan (plus interest), on the day the borrower defaults.
The only thing that would have happened is that Dubai would have been a laughing stock all over the world, for a long time.
The only question now is will $10 billion dollars be enough to wipe those smirks off your faces. Or will it take more?
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3 comments
In reply to ManSiarad (post #1)
On reflection, "Caved" was probably a poor choice of words, it was simply a matter of honour and Abu Dhabi is honourable.
You are probably right about the band-aid given that the collateral in this case was valued at $4.5 billion and is now probably not worth more than $450 million (if it was ever woth much more except as part of a Ponzi scheme).
Some of Dubai's debt is rock-solid, Emirates, DEWA, basically anything controlled by Sheikh Hamdan or Sheikh Ahmed.
But that could easily leave $30 to $40 billion AWOL.
Economics had nothing to do with it, and if Moody's downgrades Abu Dhabi's debt due to something that a private shareholder company that is registered in a free zone outside the jurisdiction of the UAE Federal government does, well that just proves (again) how incompetent Moody's is.
Any debt issued by Abu Dhabi or explicitly guaranteed by it should not be rated AAA it should be rated AAAAA minimum, which is something that PIMCO figured out when they swooped in to buy it up when momentarily it was affected by the situation in Dubai.
Insofar as Dubai's debt is concerned, well the more they borrow the more Abu Dhabi is going to be asked to step in.
Insofar as the economy of Dubai is concerned, what made Dubai work in the first place, still works great.
Abu Dhabi doesn't need the money of overseas investors, it allows them to invest as minority shareholders so that they have skin in the game when they bring their technology and expertise. That's like a favor.
Politics also played an important part, all my Abu Dhabi UAE friends are exstatic, like "the UAE is really united" even when I tell them the main benificiary of the largess was the Royal Bank of Scotland and Gordon Brown. But I can see their point of view.
But Abu Dhabi has no desire to "control" Dubai, it put up with Dubai supporting Iran in the Iraq-Iran war (UAE supported Iraq), Dubai is not a member of OPEC (UAE is), they set up free zones to get around UAE Federal Companies Law, and they sold land in UAE to foreigners (Sheikh Zayed was adamantly opposed to that).
All Abu Dhabi would like is if Dubai can do whatever it wants to do, without asking them for more money than they already hand over via the Federal Budget which they fund.
In reply to ManSiarad (post #1)
Great post, Man Siarad!
The key points that I agree with are that this is a) a "band-aid" and b) a warning shot against neighbourly interference.
Put another way, one might think it is the minimum requirement in the circumstances - so the key question is "what happens next?"
I think one can be fairly sure that the bail-out won't have come without strings attached - but it may well take time to work out what those strings might be. Do they, for instance, impact Dubai's economic strategy? Do they affect the aspects of Dubai's economy on which the confidence of Western lenders and investors has been predicated?
ee
Andrew Butter, whose knowledge of the UAE goes way back, though he's too modest to mention it, should know better than to run with this headline:
Abu Dhabi Caves And Pays Dubai Debts
First, the amount provided is only a small part of what is actually needed to pay off the debts of Dubai World alone - one very well-informed UAE resident last night described it to me as a 'band-aid'. It'll stem the flow for the time being, but it's not a 'solution', by any means
Secondly, there's been no public indication of what conditions have been placed on the provision of funds (whether they're a gift or a loan repayable at some time in the future). Is Abu Dhabi to have first pick of some prime assets? Has there been some agreement that Dubai will scale down its ambitions in the future? (Cutting its coat to suit its cloth, perhaps?).
Thirdly, what agreement has been reached, if any, on how Dubai is to proceed in future in terms of its aspirations and expenditure (and debt-servicing)? It's interesting to see the emergence of Sheikh Ahmed bin Saeed Al Maktoum as a key public player. He's the last son of the grandfather of Dubai Ruler Sheikh Mohammed bin Rashid Al Maktoum. A year or two younger than Sheikh Mohammed, IIRC, but with a good record as chief of Emirates Airline and with good relations with Abu Dhabi. Most definitely not to be written off as a mere adjunct to the Ruler.
Fourthly, Abu Dhabi, I suspect, stepped up to provide this (relatively-small) bail-out because of the clear recognition that the Dubai World issue was having a major impact on the rest of the UAE's economy, including Abu Dhabi's.
Andrew Butter notes:
It might be worth remarking that neither the Emirate of Abu Dhabi nor the Federal Government of the UAE was under any obligation, either legally, politically or morally to pay Dubai’s debts
True enough, but there were pretty good economic reasons why it makes good sense for Abu Dhabi to have acted. Downgrading by Moody's of borrowings by Government-related firms hasn't just been confined to Dubai-owned firms while potential overseas investors for Abu Dhabi projects might well have been inclined to tar Abu Dhabi with the same brush as Dubai, however inaccurate that might be. So yesterday's move is in Abu Dhabi's interest too - though that alone won't have been sufficient, in my view, to have accounted for the step (see point two, above).
Fifthly, the provision of the US $ 10 billion sends a clear message to the rest of the GCC states that the UAE remains capable of dealing with its own problems and that they needn't think of meddling, by making their own offers of funds to Dubai, for example. it's not been widely noted that the annual Gulf Co-operation Council summit got under way yesterday. The US $ 10 billion sends a clear message to the Saudis and the Kuwaitis, in particular.
So I wouldn't agree that this is a sign of Abu Dhabi 'caving in'. It's a bit more complex than that - and the most important element, particularly for the long-term, in my view, at least, (though there are many in the region who share it), will be a change in the relationship between Abu Dhabi and Dubai and, therefore, for the nature of the UAE federation. In the past, Dubai has taken the view that it can go it alone on most matters, including, in particular, the nature of the model for economic growth it seeks to follow. I suspect that view has many fewer adherents today than it did a few months ago. I suspect, too, that we'll see a bit more transparency coming into play in terms of borrowings by Dubai-related firms.
Andrew Butter asks:
The only question now is will $10 billion dollars be enough to wipe those smirks off your faces. Or will it take more?
Well. it'll take much more than US $ 10 billion before Dubai's debts are under control, but I suspect that there are now some wiser (and richer) hands on the tiller, even if they're not yet completely in control of steering the ship.
Man Siarad