Local Commentators: UAE Central Bank Unlikely to Require Provivions for Dubai World

The 8 December issue of AlBayan Newspaper Abu Dhabi contains an interesting article on Dubai World.

Looks like a piece designed to steer towards a goal:  no provisions for Dubai World.

The argument builds its case through a series of steps.

It begins by quoting unnamed British bankers as saying that the current negotiations would lead to a mutually satisfactory solution of a rescheduling.  AA:  As this story goes, it's a simple matter of coming to an agreement to re-time payments.  And such a mutually satisfactory agreement is close at hand.   No real problem.

Then Abdul Rahman Al Saleh, Director General of the Emirate of Dubai Finance Department, is quoted  that the Emirate of Dubai is fully capable of discharging its obligations.  AA:  A bit of misdirection.  The issue isn't the Emirate's capacity to service its debts but its commercial companies'.

Then he's quoted strongly refuting the assertion that the Government of Dubai had recently announced that it would never guarantee Dubai Group's debts as though it were a surprise.  He noted that the fact that Dubai Group's constituent documents clearly state that there was no guarantee and that it's appropriate to make a distinction between the Government and these companies such as Nakheel and Limitless.  AA:  If you thought you had a government guarantee, you were mistaken.  It's your own fault.  No quibble from me on this point.  Even though you might have noticed the Government of Dubai "logo" on the prospectus for the DEWA Sukuk (with the Government in the honored "on the left" position.  But buying financial instruments is just like buying toothpaste.  One has to be able to distinguish among the claims made.  Will this toothpaste really improve my social life?  Does this sukuk really have a government guarantee?  If you read the prospectus, you saw that it didn't!

Then Moody's is quoted that Dubai World and DEWA are fully capable of attracting new investments once the current hubbub quiets down.  AA:  I'd like to see the original.  I'll bet there are all sorts of caveats.  Higher pricing.  Limited amounts.

Then Jean Claude Trichet, Governor of the European Central Bank, that Dubai does not pose any sort of a real crisis to the world economy.  AA:  The collectability of the debt and its impact on the world economy are two different things.  The world economy does not have to collapse for a lender to lose a good portion of his loan to Borrower A.  Or Borrower "D".

Bankers and financial experts consider it unlikely that the Central Bank will require local banks exposed to Dubai World to take any provisions since it is a large company and still continues to enjoy the confidence of local and foreign investors.  As well since the company merely asked for an extension of payments and not any cancellation of its debts.  AA:  This is the heart of the argument.  Not sure the too big to fail argument works w\ithout a government guarantee.  Usually too big to fail is the argument for getting one.  Many large companies have gone "south".   Enron for one.   From the rush by various financial institutions to make it clear through public announcements that they have not extended credit to Dubai World, I'm guessing there's a strong argument against the maintenance of confidence by investors.  From the reaction of local stock markets, there's a similar indication.   Finally, let's wait to see the final restructuring package before we rush to determine that there is no haircut - either direct or indirect.  There are rumors that Nakheel and other companies were offering construction companies 75% payments as final settlements with a confidentiality/non disclosure agreement part of the package.   If they can't pay suppliers why should we think they can pay bankers?  To be fair as well we shouldn't yet be assuming there will be haircuts.

Of course the Central Bank will make up its own mind and will speak for itself. AA:  And here there will probably be public policy considerations mitigating against significant provisions unless the situation  becomes obviously desperate.  Likely outcome is to put a bandage on the wound and hope that a miracle cure is found in the not too distant future.