By providing a $10 billion lifeline to Dubai on Monday, oil-rich Abu Dhabi has granted its debt-stricken neighbor a critical short-term reprieve from its creditors. But in doing so, it also appears determined to tighten the reins that Dubai has long resisted.
For decades, Dubai, as the most aggressively expansionist of the seven emirates that make up the United Arab Emirates, had claimed a special autonomy from Abu Dhabi, the more conservative seat of the federal government.
This freedom let Dubai, which lacks significant oil reserves, establish itself as a city-state that welcomed all comers — from Iranian and Israeli executives to Western tourists and profit-hungry bankers.
But the $100 billion or so in liabilities that Dubai accumulated in the process proved to be unsustainable, threatening not only itself but the federation as a whole.
Indeed, some analysts now say that Dubai may have taken its last truly autonomous decision when it declared a six-month “standstill” last month on the $26 billion owed by Dubai World, its struggling flagship conglomerate, a decision that took the Abu Dhabi government as well as Dubai’s bankers by surprise.
“Dubai has always been a reluctant member of the U.A.E. federation and has carefully guarded its autonomy,” said Jim Krane, the author of “City of Gold: Dubai and the Dream of Capitalism.” “In the flourish of a pen, Abu Dhabi just tightened the union and its grip over it.”
But even as Dubai appeared to be bowing to the inevitable, the markets cheered the unexpectedly swift move by Abu Dhabi.
Stock markets across Asia rebounded after the announcement, and Europe and Wall Street were up as well. In Dubai and Abu Dhabi, beaten-down stocks of banks and real estate companies rallied sharply.
It remained unclear exactly how Abu Dhabi came to its decision. But, according to one person who was briefed on the discussions, it represented the “apex of presidential decision-making,” referring to the frequent communication in the last weeks between Dubai’s ruler, Sheik Mohammed bin Rashid al-Maktoum, and his cousin Sheik Khalifa bin Zayed al-Nahyan, who is the president of the United Arab Emirates.
According to this person, who was not authorized to speak for the record, the intensive talks about the true nature of Dubai’s debt problems broke ground in communication and disclosure between the emirates — a sign that from here on, Abu Dhabi will impose a much higher level of scrutiny and supervision over Dubai’s decisions, financial and otherwise.
Blood ties also served their purpose. Not only are the rulers of Dubai and Abu Dhabi descendants of the Bani Yas tribe that first settled the lonely stretch of desert in the 18th century, they are also joined by marriage. The daughter of Sheik Mohammed of Dubai recently married Sheik Mansour bin Zayed al-Nahyan, the half brother of Sheik Khalifa and a member of the federal cabinet.
It became clear that what had started as a negotiating ploy by Dubai World with its creditors had become a compounding crisis that threatened the global credibility of not only Dubai, but the United Arab Emirates itself. Therefore, decisive action was taken.
Dubai World’s standstill created even more of an uproar when a group of foreign hedge funds that had recently become large holders of the bonds of Nakheel, Dubai World’s troubled real estate venture, threatened to drive Dubai World into default by rejecting its proposal to delay interest payments.
While there have always been tensions between the expansionist Dubai and more conservative Abu Dhabi, the prospect of foreign investors laying claim to some of the United Arab Emirates’ most valuable properties, like Dubai’s port operations, seems to have been justification enough for Abu Dhabi to step in.
According to a statement released on Monday by Dubai, the $10 billion was to be used to cover the $4.1 billion owed to the Nakheel bondholders — due on Monday — as well as to provide money for the company to pay its creditors through April 2010 on the condition that the standstill agreement was accepted.
The government also said that it would impose a “comprehensive reorganization law” to help creditors, a step that is likely to result in measures that would allow ailing companies to restructure their debts in a more orderly process.
Even with the $10 billion bailout, Dubai remains heavily burdened with debt. According to research by EFG Hermes in Dubai, it will have more than $60 billion in debt due in the coming years.
Dubai World, for example, still owes about $18 billion; Dubai Holding, the investment vehicle of Sheik Maktoum, owes about $8 billion; the Investment Corporation of Dubai owes $26 billion; and the Dubai government itself must repay $16.3 billion.
And while the bailout will probably make it easier for these various entities to restructure their shorter-term obligations with the help of their banks, it seems certain that they will only be able to do so at higher interest rates to reflect the increased risk Dubai debt now represents.
“Fundamentally, little has changed for Dubai’s outlook,” said Fahd Iqbal, an analyst at EFG Hermes. “We continue to see risk of further debt problems emerging in the coming months and quarters, particularly from Dubai Holding and Istithmar,” the investment arm of Dubai World, “and hence we are keeping our elevated equity risk premium.”
But for Abu Dhabi, long eager to bring Dubai deeper into its union, an enhanced risk premium for the federation’s future borrowings may well be a price it is willing to pay.
Bettina Wassener contributed reporting from Hong Kong.