LONDON: Abu Dhabi’s $10 billion bailout of Dubai World will boost confidence and please Nakheel bondholders. But this volte-face won’t restore the credibility lost over recent weeks.
Dubai never loses the ability to surprise. After shocking the capital markets last month by saying it wouldn’t stand behind Dubai World and its Nakheel property subsidiary, it has now announced a bailout of Nakheel’s first bond maturity as well as a further $5.9 billion of working capital for Dubai World.
Dubai clearly underestimated the impact of its announcement last month that it was seeking a standstill on Dubai World’s debts. The move damaged its reputation in the capital markets, jeopardized its future as a financial center and knocked the ratings of state-linked and private companies — as well as harming the region as a whole. Dubai’s U-turn may also be linked to the fact that Nakheel’s bondholders had formed enough of a position to prevent a standstill and force a default on both Nakheel and Dubai World. That would have inflicted further reputational damage.
With the first of the bonds out of the way, Dubai can now get on with restructuring Dubai World’s remaining $22 billion debt. Maybe that can be done consensually. But, just in case it can’t, Dubai has added a stick to its carrot. A new tribunal is being established which could theoretically impose a solution. Whether creditors accept that such a retrospectively-created tribunal has international legitimacy remains to be seen.
What’s more, despite Dubai’s new fondness for the word “transparency,” there are two unanswered questions. First, what are the terms on which Abu Dhabi has supplied Dubai with the $10 billion? Second, will international and local creditors be treated equally?