DUBAI: Abu Dhabi threw its flashy but debt-laden neighbor Dubai a $10 billion lifeline on Monday to head off a bond default, cheering Gulf and global markets but raising questions about the undisclosed terms.
The surprise rescue should enable Dubai World to repay a $4.1 billion Islamic bond its property developer unit Nakheel was due to honor on Monday, but which has a 14-day grace period for payment.
The cost of insuring Dubai’s debt against default fell sharply on the news and the stock market in the glitzy emirate rose 10.4 percent, its biggest one-day gain in 14 months. Shares in Abu Dhabi and Qatar also recovered on relief that an immediate crisis had been averted.
The bailout marked a spectacular double policy shift. Dubai last month refused to take responsibility for Dubai World’s debts, and Abu Dhabi had given no hint that it would ride to the fellow emirate’s rescue.
A Dubai government statement said the remaining funds would support Dubai World until the end of April next year.
But the conglomerate at the center of a $26 billion debt storm still needs creditors to agree a standstill on a massive restructuring in order to get financial support to cover working capital and interest expenses.
Analysts said the emirate’s troubles were far from over, and they questioned a statement by a Dubai government source that there were no conditions on the loan beyond the debt standstill.
“We’ve still got $35 billion due in bonds, loans and repayment over the next couple of years, so this is only one thing,” said Saud Masud at UBS. “The big question is how are they going to do this next step?” Neither emirate made clear whether the bailout was a loan or a grant. A Dubai government source who would not give his name told journalists on a telephone conference call that there was “no conditionality,” although he also said the terms were “internal” to the governments involved.
Among issues on which Abu Dhabi may seek concessions are Dubai’s trade with Iran, the future of its Emirates airline, and its nightlife. Upping pressure for a debt restructuring, Dubai announced it would implement immediately an insolvency law modeled on US and British practices in the event that Dubai World needs to seek protection from its creditors.
A government statement said this was necessary because Dubai World’s existing structure did not allow it to seek protection from creditors .
“This is kind of above and beyond what people expected. It is a crucial and essential lifeline,” said John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole in Riyadh. “That should bring in a lot of confidence. Basically Abu Dhabi is footing the bill.
“I highly doubt this kind of money has no strings attached. There was no other choice for Abu Dhabi but to bail out Dubai. The federation would have been at stake.”
The US dollar jumped against the yen, while Asian stock markets rebounded. US S&P stock futures jumped 0.7 percent, reversing early losses, and European shares were also higher.