The announcement left investors feeling wronged and wrong-footed. Only weeks ago, Sheikh Mohammed bin Rashid al-Maktoum, Dubais ruler, assured investors that the emirate would soon raise the funds to meet current and future obligations. Either he was not ready to reveal what was afoot, or he did not know. In an autocratic regime like Dubai, bad news acquires an extra coating of sugar with each step it takes up the hierarchy.
Dubais debts are heavy, amounting to about $80 billion including the government and the conglomerates it controls. Investors had half-expected Dubai World to seek forbearance from its bankers, asking them to extend their loans. But they felt sure the emirate would make good on publicly traded instruments, and in particular Nakheels sukuk, rather than suffer further damage to its financial reputation.
The dismay of investors was quickly apparent in the market for credit-default swaps (see chart) and in the equally active market for gossip. Normally we know whats going on, says one sheikh in Sharjah, another member of the United Arab Emirates. Now we havent a clue. This smacks of a complete lack of control. Credit-rating agencies quickly downgraded all government-related debt. Whether the standstill counts as a default depends on whether Dubai is asking investors to defer their claims or telling them to. The answer probably depends on how many of Nakheels bondholders insist on timely repayment on December 14th. If push comes to shove, the emirate surely has the means to satisfy many of them. It raised $10 billion from Abu Dhabi, its wealthier neighbour, in February. And hours before it requested a standstill, it said it had raised another $5 billion from two Abu Dhabi banks, although only a portion of that was available immediately.
These bail-out funds flow to the Dubai Financial Support Fund, a committee which is overseeing the restructuring of Dubais indebted companies. It is described by one banker as a command-and-control cockpit, imposing some financial discipline on Dubais government-backed champions.
Dubai sorely lacked such oversight in the run-up to the crash. Indeed, a month ago, bankers worried that the reorganisation of Dubai Inc still might not go far enough. Some in the emirate seemed tempted to declare victory over their woes, pretend that every balance-sheet was sound, and go back to business as usual. But the request for extra time suggests the Support Fund is digging in for a longer campaign. In this stiffening of resolve, some see the influence of Abu Dhabi. Rich in oil and conservative in outlook, its rulers have viewed Dubais penchant for frolic and folly with distaste and occasional envy. It is possible they are now putting their foot down, fearful that if Dubai does not take its share of pain, it will be back for more money in the next downturn.
Unlike Abu Dhabi, Dubai has to borrow to finance its future. As the recovery takes hold, it will make money again from its property, tourism, trade and financial industries. One banker describes the emirate as an integrated service industry, no different from a very large Euro Disney. Such an industry can and should carry a certain amount of debt. But it has to learn how to pay for that debt from serving customers, not speculators.
The Economist Newspaper Limited