Dubai's debt problems clouded national day celebrations in the United Arab Emirates on Wednesday — at least for a shaken financial community trying to work out whether any of their loans enjoy government protection.
Flags, fairy lights and fanfare marked the UAE's 38th anniversary at a moment when Dubai's request for a payment delay on $26 billion of debt owed by government-owned Dubai World has exposed the frailties of "quasi-sovereign" lending.
It has also provoked questions about whether Abu Dhabi, the oil-producing powerhouse of the seven-emirate federation, will rescue its ambitious neighbour, perhaps exacting a political price.
Abu Dhabi's ruler, who is also the president of the UAE, said on Tuesday that the national economy was in good shape, but made no comment on the debt woes disclosed by Dubai on Nov. 25.
UAE markets, battered in two days of trading this week, were closed on Wednesday, but other Gulf bourses were expected to fall as the impact of Dubai's debt restructuring continues to send ripples across the region.
Anshuman Jaswal, an analyst with Celent, a Boston-based financial research and consulting firm, said Dubai World's planned restructuring had shown the need for transparency.
"The panic caused could have been at least partly averted if there was clarity about the fact that debt worth $26 billion needed to be restructured," Jaswal said.
"Secondly, companies such as Dubai World can no longer be seen as having the protection of their respective governments. This is true all over the region and not just in Dubai."
Dubai World said on Monday that it had started negotiations with its lenders over $26 billion of debt owned by its main property firms, Nakheel World and Limitless World, that matures before the standstill deadline of May 30, 2010.
This indicates a staggered approach to solving the Emirate's debt problems — tackling bond and loan maturities as they fall due — which will do little to reassure loan and bondholders who are scrambling to assess support for their debt, bankers said.
"If banks are put into a Dubai World restructuring, they will have to decide whether to cut their lines to Dubai and if they would be prepared to refinance other Dubai debt," one London-based banker said.
The $26 billion of debt affected under the standstill includes a $3.52 billion sukuk bond for Nakheel that matures in December and another 3.6 billion dirham bond due May 2010.
SPOOKED MARKETS RECOVER
Global markets were alarmed when news first broke that Dubai World, which led Dubai's transformation into a regional hub for finance, investment and tourism, could not meet its debt commitments.
But fears of contagion have eased despite further falls in Gulf stock markets, and European finance ministers said on Tuesday that Dubai's debt troubles would have little impact on their region, which is emerging from recession.
"What we understand today is there is no systemic risk," said French Economy Minister Christine Lagarde. "It's not a drama for the world of finance and the impact seems to be essentially regional."
Dubai's government has made clear it will not guarantee the debts of Dubai World — the group has almost $60 billion in liabilities overall — including those of units not included in the restructuring.
"It seems likely that an arrangement will be found with the creditors," said Baldwin Berges, in a note for Silk Invest, a British fund manager, arguing that market reaction could have been less severe had expectations been managed better.
"Dubai is a maturing economy and it is now confirmed that there is room for success and failure," he wrote.
"By the initial reaction on markets, it seems that many foreign investors actually believed that businesses were `bullet proof' in Dubai and that they could count on unconditional financial support from the local authorities."
Legal documentation showed the government did not guarantee Dubai World's debt, something investors receiving a spread above governmental debt should have realised, Berges wrote.
"In contrast to some developing countries which have stepped up state aid in the last months, Middle Eastern governments are choosing to not to so," he added. "In essence, they are sending out a message that companies and their investors must understand they are fully accountable for their actions."
