Friday, November 27, 2009

Northern Trust on Dubai

by Calculated Risk on 11/27/2009 06:29:00 PM

James Pressler at Northern Trust provides an overview of the Dubai situation: Dubai’s Latest Mega-project – A Massive Default? (pdf) A few excerpts:

The complexities of the UAE’s governmental structure make the situation difficult to grasp at first glance, but the problem can be captured by a few basic points. First, Dubai is the second-largest emirate in the UAE next to Abu Dhabi, but Abu Dhabi is also the power of the national government and has been challenged by Dubai’s meteoric rise. Next, the UAE has a sovereign wealth fund estimated at one half-trillion dollars in case of emergency, so money is clearly available at the national level to bail out Dubai if that route is chosen. Lastly, the national government wants to emerge from this situation with international markets assured that a state-run entity has the backing of the government and will be subsequently subject to reform and accountability. Taken together, these points plus an appreciation of the politicial undercurrents suggest a scenario that avoids outright default.
This suggests that Abu Dhabi will bailout Dubai, but that isn't certain:
The first sign of things to come could be as early as the first week in December, when Gulf markets re-open from the Eid al-Adha holiday (Dubai World announcing its debt postponement plans just before Eid celebrations was in all likelihood not a coincidence). This will mark the first chance for officials to state positions and make confidence-building claims, with the further interest of calming international markets. Between that time and the December 14 due date for Dubai World’s next debt payment, we expect to see a concrete plan laid out for bailing out the conglomerate and some pressure taken off the credit markets. However, if no settlement can be reached, it would not surprise us if another major entity started talking about restructuring or a debt freeze before year-end – and not necessarily a company in the UAE.
And from the Financial Times: Abu Dhabi expected to prop up smaller brother
[W]ith Dubai raising the possibility that one of its flagship entities may default, attention is now focusing on just how far Abu Dhabi is willing to go to bail out its smaller brother. Underlying the uncertainty, it is thought that Abu Dhabi officials were caught unaware by Dubai World’s dramatic statement ... Ultimately, though, there is consensus that Abu Dhabi will not see it fail.
excerpted with permission
Should be an interesting couple of weeks.