Interesting time. In Europe, the Creditanstalt's bankruptcy and what followed was what turned the recession into the European Great Depression...
Roula Khalaf: The emirate has a lot of explaining to do: It came in a short statement about the restructuring of Dubai World, one of the emirate’s biggest and best-known companies, with the big news buried towards the end. But the decision to ask bondholders of the company and its most troubled subsidiary, Nakheel, to extend maturities from December to May 2010 was a bombshell. And the Middle East’s most glamorous and creative emirate will pay the price of its decision for a long time to come.
For months, all indications in Dubai were that the heavily indebted city-state, symbol of the rise of the region as an economic powerhouse as much as of the excesses of the pre-financial crunch days, would meet the obligations of the companies it owns, and that Nakheel’s $4bn debt due in December would be repaid. Only a few weeks ago, bankers in the region were so upbeat that some had suggested that Dubai might not even need to raise more funds to pay debts due this year. It helped of course that the emirate was showing signs of recovery, with fewer expatriates packing their bags than had been expected, retail sales on the rise and the real estate sector, devastated by the economic crisis, beginning to stabilise. The government itself looked confident too, and it went to the markets to raise funds, bringing in $2bn in Islamic bonds last month.
As always, though, the problem in Dubai is that no one had all the facts, and perhaps some in the financial community had all the wrong assumptions. The whole affair, one financial analyst told me on Thursday, was “typical of the way things work in Dubai – top down and in a vacuum, and that makes it very difficult for investors”. True, top officials had indicated repeatedly that Dubai would not default on its debt – and Nakheel, developer of the extravagant Palm real estate project, was too important for Dubai to allow it to default. What officials have not explicitly said, however, was that the repayments would be made on time.
Interestingly, moreover, the prospectus that Dubai recently issued to test market appetite for government bonds said that the government was “not legally obliged” to meet the obligations of related entities – what is commonly referred to as Dubai Inc – but might at its sole discretion decide to extend such support. Most of the funds raised in the past year – including from Abu Dhabi banks on Wednesday, the same day that Dubai said it intended to call a “standstill” until May 30 on all its Nakheel and Dubai World debt due in December – were by the government itself, rather than individual companies.