November 27, 2009
Dubai oh my, Bis Default & Logic
Obviously in financial and economic circles the debates are raging like nobody's business on
(i) The technical default (or effectively asking for it, even as an optional choice, it is a "credit event"), why
(ii) Timing and thinking
So far, I think everyone feels that it must be driven by some serious dissension between the Dubai and Abu Dhabi families, and Al Maktoum decided to go nuclear (probably rather than pay a serious pound of flesh in lost assets to Abu Dhabi). A "My pain is your pain" calculation. Also they seem to have bizarrely thought that this news could be "buried" over the holidays - very bad miscalculation. Trying to bury it (maybe buying time) after spending the past few weeks talking happy talk (rather than managing down expectations) just made it far worst, as the rumours flying now are really catastrophic.
Of course, a deeper problem may be that Emirates in whole may be more liquidity constrained than they have let on, and as such Abu Dhabi despite its massive pools of capital, feels obliged to bargain hard for its constrained liquidity to begin with. Nevertheless, I favour the Family Argument thesis (between Dubai and Abu Dhabi) that got bitter, thus provoking a stunningly ill-considered decision that was also just stunningly poorly framed and timed.... and presented. Impressive actually the extent of bad actually.
As for Dubai, even if they walk back, Dubai has inexplicably taken a shotgun and fired at its own foot. Best case, they lose some of their own toes, worst case.... worst case they blew off their foot and ours too as this has all the ability to set off Financial Crisis 2008 Part II, at the very least for emerging markets that are heavily exposed to international flows.
This is a nasty event with wider implications, but underlines what I have been saying for years, too much of the Emirates - Dubai story has been of dubious transparency.
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Some complementary thoughts to yours.
Posted by: Abu Arqala at November 27, 2009 08:37 PM
Well there's an uplifting thought to end my day. I guess my portfolio can't really go much lower anyway.
Posted by: Schmedlap at November 27, 2009 10:58 PM
You beat me to it L. I was going to take it from the perspective of Islamic Finance though. You know, all those suckers gloating about it being more resilient and stuff.
Shaheen, actually a post from you on the Islamic finance item would be good. Dubai is worth many posts. You're quite right re the misplaced gloating the past 9 months.
Posted by: The Lounsbury at November 28, 2009 03:52 AM
Interesting infos from Suq Al Mal, I should highlight it.
Posted by: The Lounsbury at November 28, 2009 07:23 AM
Thanks for the kind comments.
With respect to Islamic finance, there are some interesting issues in play.
First, because of the nature of "Islamic" finance, the legal contracts for such transactions are structured in ways that differ from typical non-Shari'ah financings.
And therein lies a potential rub.
Second, because these "Islamic" structures are fairly new, they have not been tested in court in distress situations (bankruptcy, insolvency, administration).
I've started penning a few thoughts on this topic - and modestly he says - would refer to an earlier post of mine on the topic. http://suqalmal.blogspot.com/2009/11/restructurings-islamic-financing.html
BTW I found you through the blog of the MEI Editor Michael Collins - so a hat tip to him for the link.
Posted by: Abu Arqala at November 28, 2009 01:10 PM
[In] a statement, [Dubai World] said that it "intends to adopt a policy of regular communication and will provide further updates as the process [of restructuring debt] develops".
I guess they're fully committed to transparency now!
Posted by: dubaiwalla at December 1, 2009 02:23 AM