"The Dubai government has proposed a delay of debt repayments after property developer and investment company Dubai World requested a ‘standstill agreement’ with its creditors.
Dubai World owes $59 billion of Dubai’s $80 billion debt and has assets including stakes in MGM Mirage and Standard Chartered Bank. The debt is material enough to the Dubai economy for the government to intervene and propose the delay.
Dubai is one of the seven emirates that make up the United Arab Emirates (UAE) in the Gulf region. Abu Dhabi is the strongest financially as it holds 8% of the world’s oil reserves and they have already begun supporting Dubai by buying $5 billion in bonds yesterday.
Dubai has been running a ‘build it and they will come’ approach to developing their economy. There have been major developments such as a palm tree shaped island and the world’s tallest building proposed (which usually means that a country or company is heading toward a downturn).
As you would expect, the largest creditors of the company are other UAE banks although Bloomberg reported that a number of European banks such as HSBC, Barclays, Lloyds and Royal Bank of Scotland have an unspecified exposure. Shares in these European banks were down heavily overnight.
Credit markets up to this point have assumed that Abu Dhabi would step in if required. However, Abu Dhabi has made it clear that they are not going to bail out Dubai World. We expect that Abu Dhabi will not allow Dubai itself to default as this would destabilise the country politically.
As a further undercurrent, apparently there has been considerable pressure from Abu Dhabi and the US on Dubai to fall in line with their trade polices with Iran (Iran is a major Dubai trading partner). There is no doubt Abu Dhabi will be using the crisis as a lever and will make Dubai absorb considerable pain but we expect at some point they will back Dubai.
We expect that Dubai will enforce sale of Dubai World offshore assets. There will also be pressure on Dubai to sell other assets such as the global portfolio of port operators owned by company DP World.
It will take some weeks for the markets to digest this development and investors will be looking for confirmation that Abu Dhabi will back Dubai." Ord Nexia Financial Services Newsletter 27 Nov.