Dubai debt plea sends fear around world

[jimmy olsen]

Ouch, that doesn't sound good.


http://www.msnbc.msn.com/id/34165138/ns/business-world_business/

Dubai debt plea sends fear around world
Once one of the world's richest cities, emirate now can't pay its bills

updated 8:04 p.m. ET Nov. 26, 2009

DUBAI, United Arab Emirates - Just a year after the global downturn derailed Dubai's explosive growth, the city is now so swamped in debt that it's asking for a six-month reprieve on paying its bills — causing a drop on world markets Thursday and raising questions about Dubai's reputation as a magnet for international investment.

The fallout came swiftly and was felt globally after Wednesday's statement that Dubai's main development engine, Dubai World, would ask creditors for a "standstill" on paying back its $60 billion debt until at least May. The company's real estate arm, Nakheel — whose projects include the palm-shaped island in the Gulf — shoulders the bulk of money due to banks, investment houses and outside development contractors.

In total, the state-backed networks nicknamed Dubai Inc. are $80 billion in the red and the emirate needed a bailout earlier this year from its oil-rich neighbor Abu Dhabi, the capital of the United Arab Emirates.
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Markets took the news badly — with the Dubai woes and the continued fall of the U.S. dollar giving investors twin worries. Dubai's move raised concerns about debt across the Gulf Region. Prices to insure debt from Abu Dhabi, Qatar, Saudi Arabia and Bahrain all rose by double-digit percentages Thursday, according to data from CMA DataVision.

In Europe, the FTSE 100, Germany's DAX and the CAC-40 in France opened sharply lower. Earlier in Asia, the Shanghai index sank 119.19 points, or 3.6 percent, in the biggest one-day fall since Aug. 31. Hong Kong's Hang Seng shed 1.8 percent to 22,210.41.

Wall Street was closed for the Thanksgiving holiday and most markets in the Middle East were silent because of a major Islamic feast.

"Dubai's standstill announcement ... was vague and it remains difficult to discern whether the call for a standstill will be voluntary," said a statement from the Eurasia Group, a Washington-based research group that assesses political and financial risk for foreign investors interested in Dubai.

"If it is not, Dubai World will be going into default and that will have more serious negative repercussions for Dubai's sovereign debt, Dubai World and market confidence in the UAE in general," the statement added.

Credit crunch
Dubai became the Gulf's biggest credit crunch victim a year ago. But its ruler, Sheik Mohammed bin Rashid Al-Maktoum, had continually dismissed concerns over the city-state's liquidity and claims it overreached during the good times.

When asked about the debt, he confidently assured reporters in a rare meeting two months ago that "we are all right" and "we are not worried," leaving details of a recovery plan — if such a plan exists — to everyone's guess.

Then, earlier this month, he told Dubai's critics to "shut up."

"He needs to produce a recovery plan that will be respected by those who want to do business with Dubai," said Simon Henderson, a Gulf and energy specialist at the Washington Institute for Near East Policy. "If he does not do it right, Dubai will be a sad place."

After months of denial that the economic downturn even touched the glitzy city-state, the Dubai government earlier this year showed signs of trying to deal with the financial fallout that has halted dozens of projects and touched off an exodus of expatriate workers.

In February, it raised $10 billion in a hastily arranged bond sale to the United Arab Emirates central bank, which is based in Abu Dhabi.

The deal — seen by many as Abu Dhabi's bailout of Dubai — was part of a $20 billion bond program to help Dubai meet its debt obligations.

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On Wednesday, the Dubai Finance Department announced the emirate raised another $5 billion by selling bonds — all taken by two banks controlled by Abu Dhabi.

Abu Dhabi's ruling Al Nahyan family has been more conservative with its spending, investing oil profits into infrastructure, culture and state institutions. During Dubai's real estate bonanza, the Nahyans saw their flashy neighbor race ahead with development plans and tourism plans that had plenty of hype but few details on how they would be pulled off.

Some did materialize. The more than 2,600-foot Burj Dubai is scheduled to open in January as the world's tallest building. But many other projects, including a tower even taller than the Burj Dubai and satellite cities in the desert, are still just blueprints.

Ripples felt in Ky. horse auctions
The standstill will likely not immediately affect CityCenter, an $8.5 billion casino complex opening next month in Las Vegas that is half-owned by Dubai World. A Dubai World subsidiary and casino operator MGM Mirage agreed with banks in April to fully fund and finish the six-tower, 67-acre development of plush resorts, condominiums, a retail mall and one casino on the Las Vegas Strip.

However, the standstill's effect may be felt on the famous Keeneland thoroughbred horse auctions near Lexington, Ky., where Sheik Mohammed is a prominent bidder.

Last week, Sheik Mohammed demoted several prominent members of Dubai's corporate elite and replaced them with members of the ruling family, including his two sons, one of whom is Mohammed's designated heir.

Businessmen who fell out of favor were closely associated with Dubai's phenomenal success. They include the head of Dubai World, Sultan Ahmed bin Sulayem, and Mohammed Alabbar, the chief of Emaar Properties, developer of the Burj Dubai and hundreds of other projects.

"He is trying to shake things up," said Christopher Davidson, a lecturer on the Gulf at Britain's Durham University and an author of two books on the UAE.

However, Davidson added, Mohammed's decision to replace those who helped put Dubai on the world map with his relatives might be "read as an increase in autocracy which does not look good internationally."

Not everyone is upset at Dubai Inc.'s transformation into a family business, analysts say.

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Mohammed's latest moves may have pleased Abu Dhabi more than the foreign investors, but it is Abu Dhabi that still has the strongest incentives to save Dubai from its financial misery.

"By shifting the power base back to the family things are as they should be as far as Abu Dhabi is concerned," said Mohammed Shakeel, a Dubai-based analyst for the Economist Intelligence Unit.

After an expensive adventure in doing things the Western way, it's "going back to basics" for Dubai, Shakeel added.

Copyright 2009 The Associated Press.

[HisMajestyBOB]

Sucks to be them!
Kinda reminds me of the Asian financial crisis, which injected a dose of reality into the Asian tigers.

[Caliga]

Dubai has always struck me as a gigantic house of cards.  Anyway, I hope I'm around to see their oil reserves run dry so I can laugh my ass off when it all comes completely crashing down.

[Monoriu]

Dubai is the closest thing we have to paradise on earth.  Unlimited oil wealth, construction frenzy, mighty buildings, exotic landscape.  I have always wanted to see the place.  I don't want to see a ghost town when I finally get there 

[Sheilbh]

Dubai has always struck me as a gigantic house of cards.  Anyway, I hope I'm around to see their oil reserves run dry so I can laugh my ass off when it all comes completely crashing down.

Dubai doesn't have a great deal of oil, comparatively.  That's why it's got so much debt whereas Abu Dhabi has almost none. 

That's also why it's building this massive resort.  That's one of the things they're doing to get economically ready for no oil.

[Zanza]

Dubai is a subprime debtor on a state scale.

[Razgovory]

Dubai has always struck me as a gigantic house of cards.  Anyway, I hope I'm around to see their oil reserves run dry so I can laugh my ass off when it all comes completely crashing down.

Dubai has more in common with Hong Kong then an oil state.  It's an entrepot.

[Martinus]

Who would have thought that creating a huge useless artificial island shaped like a palm leaf would be a bad financial move?!?

Seriously, if I was not personally affected by the state of the world economy, I would dance a happy jig every time someone's  monumental financial stupidity and hubris is punished in this crisis.

[The Brain]

What does he do for a living now anyway?

[CountDeMoney]

They obviously need to ramp up the white slavery.

[Grey Fox]

What has Abu Dhabi decided not to loan them any money anymore?

[The Larch]

Dubai is the closest thing we have to paradise on earth.

Unless you're a construction worker from Bangladesh whose passport has been confiscated by his employers and is living in almost full slavery and terrible work safety conditions. Or a debtor who has to flee the country leaving everything behind or be sentenced to jail, as there's no concept of bankruptcy. Or a Filipino maid whose patrons keep her as an indentured servant, unable to leave. Or a local fisherman who has seen his trade and way of life ruined by the rapid pollution of the sea due to the untreated sewage of a population that has multiplied by several orders of magnitude without the proper infrastructures to sustain it. Or if you're just a normal human being with a modicum of brain cells able to see through the mirage and see that it's an unsustainable nightmare, and a tiny speck of heart to realize that everything in Dubai is built around false hopes, poor planning and the toil and suffering of hundreds of thousands of people.

But of course it's you, so I'm just wasting my words.

[Grey Fox]

so basically, it's a lot like Hong Kong but with Muslims instead of Han Chinese?

[The Larch]

so basically, it's a lot like Hong Kong but with Muslims instead of Han Chinese?

I'd say that it's even worse, as HK still keeps a warped sense of democracy, while Dubai never had it.

[Malthus]

You mean borrowing money and using slave labour to build a giant holiday theme park for the ultra-wealthy in the middle of a desert in the middle east was a bad idea?