Abu Dhabi to give heavily indebted Dubai a $10 billion lifeline

By Howard Schneider
Washington Post Staff Writer
Tuesday, December 15, 2009

DUBAI, UNITED ARAB EMIRATES -- Oil-rich Abu Dhabi on Monday said it would provide $10 billion to pay the debts of a troubled real estate company owned by neighboring Dubai, helping avert what some analysts said could be a new crisis among overstretched governments.

Dubai said the money would let if pay off $4.1 billion due to bondholders on Monday and take a series of other steps to restore confidence in its finances. Greece also sought to allay fears, readying a plan to slash government spending to steady its finances.

Late last month, Dubai officials had said that the declining fortunes of Dubai World -- whose real estate development subsidiaries were hit hard by the global economic downturn -- had forced them to seek a six-month "standstill" on $26 billion in debts while the company was restructured.

The market reaction was swift and threatened to erode confidence not just in Dubai, but in Abu Dhabi and other members of the United Arab Emirates federation and other countries in the region. Monday's announcement sent stocks rising, with Dubai's main index posting a 10.4 percent gain.

When the first significant deadline arrived, on Monday, the implications of a default prompted action among officials concerned about maintaining favorable access to world capital markets and hoping to push ahead with aggressive development plans.

The $10 billion from Abu Dhabi -- the second time this year that the emirate has stepped in to help its more rapidly developing but oil-poor neighbor -- will also be used to pay contractors and other creditors, some of which have abandoned Dubai because of unpaid bills. In addition, Dubai officials said they were putting in place a bankruptcy law written to "internationally accepted standards" that would govern Dubai World's reorganization in coming months.

Dubai is still hoping to work out a standstill agreement on the company's debt, some of which comes due in the spring.

"We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices," Sheikh Ahmad bin Saeed al-Maktoum, chairman of Dubai's Supreme Fiscal Committee, said in a statement. "Dubai is, and will continue to be, a strong and vibrant global financial center. Our best days are yet to come."

The promise to pay the bond that fell due on Monday avoids what could have become a tangled battle between the Dubai government and the banks and hedge funds that had accumulated the debt of the Nakheel real estate development firm, the company responsible for some of Dubai's most lavish projects.

However, it leaves unresolved one key issue -- the degree to which Dubai, and by extension Abu Dhabi and other members of the UAE, regard the debts of government-owned companies like Nakheel and Dubai World as the government's responsibility.

Financial analysts here say that investors have often given favorable terms to Dubai and other gulf countries on the assumption that the debt of government-owned companies carried an "implicit guarantee" of government support in the case of difficulty -- an impression arguably reinforced by Monday's bailout.

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