Dubai looks to oil-rich neighbor for possible aid

AS world markets absorbed the shock of Dubai's debt crisis, the ruler of the once-booming city-state left town for an important meeting in a desert palace. His hosts: the leaders of neighboring Abu Dhabi whose balance sheets are flush with oil revenue.

It's not known what promises were made inside the halls in Al Ain during the parade of visitors for an important Islamic feast day on Friday. But their new relationship is clear. Abu Dhabi has the cash and cachet to be Dubai's white knight -- in a Gulf version of a too-big-to-fail bailout or to help calm markets with promises to intervene if Dubai's fiscal mess deepens.

The direction Abu Dhabi takes will likely set the tone for the coming week as analysts try to sort out what banks and institutions have the most at stake in the money crunch -- which has suddenly shifted Dubai's image from a desert dream factory of indoor ski slopes and a "seven-star" hotel to a reckless spender sideswiped by the recession and unable to pay its bills.

Just this month, Dubai's ruler, Sheik Mohammed bin Rashid Al-Maktoum, assured international investors that all was well with Dubai's finances and told media critics to "shut up."

"Depleting market confidence in Dubai carries serious risks for Abu Dhabi," said Hani Sabra of Eurasia Group, a US-based research firm that assesses political risk for foreign investors in Dubai and the Gulf.

"Differences between the two city-states remain on how to approach the economy and the financial crisis," Sabra added. "But now Abu Dhabi is obviously the more dominant emirate."

Dubai's empty pockets -- mostly drained by collapsing real estate prices and overambitious development plans -- touched off panic selling across world markets on fears that the reckoning from the global recession is not over.

In a surprise announcement Wednesday, Dubai said it seeks a six-month delay in paying creditors on nearly US$60 billion in debt held by its main development arm, Dubai World, whose holdings range from port operations around the world, Dubai's iconic palm-shaped island and the luxury retailer Barneys New York. The next tranche was a US$3.52 billion bond due December 14 by Dubai World's troubled real estate division, Nakheel.

On Friday, the Dow Jones industrial average suffered its biggest drop in nearly a month -- closing down 154.48, or 1.5 percent, to 10,309.92, in a shorted trading day because of the Thanksgiving break. Asian exchanges fell sharply for a second day, but European markets bounced back on confidence the Dubai damage would not spread to other Gulf economies.

Dubai and other Middle East financial markets reopen Monday after an Islamic holiday.

But much attention will remain on Abu Dhabi's response. It stepped in earlier this year with a US$10 billion bailout for Dubai when the first blast of the recession hit. Dubai ruler Sheik Mohammed has stressed the close bonds between the two most powerful emirates in the UAE, which celebrates its national day on Wednesday and offers a perfect forum to display unity.

An editorial in The National newspaper -- which is bankrolled by Abu Dhabi and closely reflects the opinions of its rulers -- said Dubai's infrastructure is sound and pointed out General Motors' revival after receiving a US-backed bailout in comments that suggested an unchecked Dubai meltdown could harm the entire country.

"Confidence is a fragile commodity," said the Friday editorial.

Yet Abu Dhabi's largesse may be reaching some limits. On the same day that Dubai announced its debt payment "standstill," two Abu Dhabi-controlled banks bought US$5 billion in Dubai bonds for a stopgap cash infusion, but went no further.

"I guess Abu Dhabi is saying there will be no blank check for Dubai," said Jane Kinninmont, a London-based specialist on Gulf economies at the Economist Intelligence Unit.

---

1  2  >  ...2

  SINGLE PAGE VIEW

---

Email Story    Printable View    Blog Story    Copy Headline/URL