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« Dubai oh my, Bis Default & Logic | Eid Mubarek »
November 28, 2009
Dubia, oh My III: Ongoing thoughts.
First, from comments, the author of this post : Suq Al Mal: Dubai US$5 Billion Debt Sales - Less Than Meets the Eye and An Explanation for the Restructuring at Dubai World helpfully draws attention to some very key details that deserve wider attention (as i have not seen them raised elsewhere).
In particular this:
It seems that the US$5 billion sale was actually US$2 billion in cash now with the promise to buy the remaining US$3 billion over the next year.I rather find this and other details confirming that the easy "Abu Dhabi will ride into the rescue of Dubai" commentary is far too superficial. (As this Reuters story on "aid to Dubai [from Abu Dhabi] 'case by case'" ; "... a senior Abu Dhabi official said on Saturday [that] "We will look at Dubai's commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts," ...."Some of Dubai's entities are commercial, semi-government ones. Abu Dhabi will pick and choose when and where to assist," he said.")The Cousins in Abu Dhabi will want their pound of flesh from the Al Maktoum. I'd suggest that commentators looking at this in a purely theoretical framework of sovereigns etc are going to miss important parts of the intra-family dynamics that will definitely complicate things (and note, more of the Al Maqtoum have been moved into Dubai positions of late, technocrats losing power). Too many bank analysts in Dubai have the critical analytical sophistication of high schoolers, merely asserting their hope of unbounded Abu Dhabi largesse as the analytical anchor (of course merely asserting absurdly optimistic base case scenarios was long par for the course in Dubai).
Otherwise, this post in FT's Alphaville quoting a rather sharper analyst in Dubai posing the question of whether the real depth of the debt hole is known is worth a read. It also raises the contagion risk that I touched on. I'm a lot less sanguine about that risk than the analysis there, as this as a calculated manoeuvre as Dubai's position may not resolve well - given all the ingredients of the intra-Emirati family fight over control and power, family struggles tending easier to ugly fights. Note, for example, from FT.com / Middle East - How the Dubai crisis unfolded
November 26(emphasis added).
Global markets slump on fears that any Dubai default could trigger contagion in other emerging markets. There is still no comment from the department of finance, except to insist that DP World is ring-fenced. Bondholders, led by a New York hedge fund, start to organise themselves to appoint legal advisers to communicate with Dubai World and mull legal action to recover assets.
Then, at about 11pm local time, Sheikh Ahmed bin Saeed Al Maktoum, chairman of Dubai’s supreme fiscal committee, breaks the emirate’s silence with a curt statement saying that he understands the concerns of the markets but is determined to take decisive action on Dubai World’s debt.
“The government is spearheading the restructuring of this commercial operation in the full knowledge of how the markets would react,” he says.
Otherwise, some other comments of interest, from FT.com - Dubai gambles with its financial reputation relative to financial investors who've taken a narrow analysis:
The emirate’s inability to repay also casts a shadow on the Maktoum family’s vital relations with its cousins who rule Abu Dhabi, the al-Nahyans, who seem to be letting their poorer kin sweat it out in public. One wondered what price Abu Dhabi might demand for a full bail-out. One plausible option was a tighter union among the seven UAE states, with maverick Dubai forced to trim its embarrassing ties with Iran and Israel. Dubai might also have been asked to merge its independent customs service into the federal bureaucracy. Sheikh Mohammed may be calculating that Dubai’s foreign policy freedom is more valuable than its financial reputation.(emphasis added)
There is logic in this. The bankers in London and New York have been important in nurturing Dubai’s growth. But the emirate’s ties with the region – Karachi, Mumbai, Riyadh and Tehran – are those that will make or break this city.
Of course the Al Maktoum just made the lives of their Gulf cousins and neighbours rather more 'interesting" which is certainly going to make this process more complex than someone sitting at a monitor in London might think. Also relative to the process, this observation from FT.com Editorial - A breathtaking blunder in Dubai:
... Instead of these Ivy League-educated whiz kids, he [the Emir] has fallen back on his family, the court and the traditional merchant class. .... Although, like everything else in Dubai, it was unexplained, it was interpreted as recognition that the emirate had over-borrowed and over-reached. Yet, it is not obvious that the way to re-establish credibility with the markets is to follow this up with a runic message on deferring debt repayments – and then disappear on a four-day public holiday.Indeed, but it is easier to understand as an internal Emirati "settling of accounts."
Also worth quoting, from the same,
Why Dubai World felt the need to defer repayment of a $3.5bn Islamic bond of its Nakheel property subsidiary is also a puzzle.The answers are doubtless found not on the capital markets, bond traders in London and New York are oft useful dupes...
Abu Dhabi stumped up $10bn in February; two of its banks bought $5bn in Dubai paper on Wednesday [NB: see quote above]; a $1.9bn bond issue was three times subscribed three weeks ago; and Dubai is planning to return to the market next month for a further $1.25bn. It has the money to meet its obligations – unless its debts are significantly greater than stated. Until now, moreover, there has never been any doubt that Abu Dhabi – senior partner and censorious older brother in the federal United Arab Emirates, owner of the largest sovereign wealth fund in the world (worth perhaps $900bn), and sitting on one tenth of the world’s oil deposits – would stand behind Dubai. Dubai World’s biggest creditors, furthermore, are down the road in Abu Dhabi.
Yet, the Abu Dhabi authorities appear to have had no inkling Dubai was going to spring this surprise, which is already having devastating results. The cost of protecting Dubai’s paper against default has quadrupled – putting the emirate in the same league as Iceland – and the credit ratings of its leading companies have been downgraded. Yet the fallout in raising the cost of insuring sovereign debt has spread not only across the Gulf but throughout emerging markets. This is a mess.
Something here does not add up. Why would Dubai risk such damage to its reputation when the recovery of its still viable entrepôt model depends on the confidence of the capital markets?
There is also an interesting set of questions about the Islamic finance angle to this, and a rather misplaced bit of confidence in those instruments.
The emirate’s inability to repay also casts a shadow on the Maktoum family’s vital relations with its cousins who rule Abu Dhabi, the al-Nahyans, who seem to be letting their poorer kin sweat it out in public. One wondered what price Abu Dhabi might demand for a full bail-out. One plausible option was a tighter union among the seven UAE states, with maverick Dubai forced to trim its embarrassing ties with Iran and Israel. Dubai might also have been asked to merge its independent customs service into the federal bureaucracy. Sheikh Mohammed may be calculating that Dubai’s foreign policy freedom is more valuable than its financial reputation.(emphasis added)
There is logic in this. The bankers in London and New York have been important in nurturing Dubai’s growth. But the emirate’s ties with the region – Karachi, Mumbai, Riyadh and Tehran – are those that will make or break this city.
Of course the Al Maqtoum just made the lives of their Gulf cousins and neighbours rather more 'interesting" which is certainly going to make this process more complex than someone sitting at a monitor in London might think. Also relative to the process, this observation from FT.com Editorial - A breathtaking blunder in Dubai:
... Instead of these Ivy League-educated whiz kids, he [the Emir] has fallen back on his family, the court and the traditional merchant class. .... Although, like everything else in Dubai, it was unexplained, it was interpreted as recognition that the emirate had over-borrowed and over-reached. Yet, it is not obvious that the way to re-establish credibility with the markets is to follow this up with a runic message on deferring debt repayments – and then disappear on a four-day public holiday.Indeed, but it is easier to understand as an internal Emirati "settling of accounts."
Also worth quoting, from the same,
Why Dubai World felt the need to defer repayment of a $3.5bn Islamic bond of its Nakheel property subsidiary is also a puzzle.The answers are doubtless found not on the capital markets, bond traders in London and New York are oft useful dupes...
Abu Dhabi stumped up $10bn in February; two of its banks bought $5bn in Dubai paper on Wednesday [NB: see quote above]; a $1.9bn bond issue was three times subscribed three weeks ago; and Dubai is planning to return to the market next month for a further $1.25bn. It has the money to meet its obligations – unless its debts are significantly greater than stated. Until now, moreover, there has never been any doubt that Abu Dhabi – senior partner and censorious older brother in the federal United Arab Emirates, owner of the largest sovereign wealth fund in the world (worth perhaps $900bn), and sitting on one tenth of the world’s oil deposits – would stand behind Dubai. Dubai World’s biggest creditors, furthermore, are down the road in Abu Dhabi.
Yet, the Abu Dhabi authorities appear to have had no inkling Dubai was going to spring this surprise, which is already having devastating results. The cost of protecting Dubai’s paper against default has quadrupled – putting the emirate in the same league as Iceland – and the credit ratings of its leading companies have been downgraded. Yet the fallout in raising the cost of insuring sovereign debt has spread not only across the Gulf but throughout emerging markets. This is a mess.
Something here does not add up. Why would Dubai risk such damage to its reputation when the recovery of its still viable entrepôt model depends on the confidence of the capital markets?
There is also an interesting set of questions about the Islamic finance angle to this, and a rather misplaced bit of confidence in those instruments.
Posted by The Lounsbury at November 28, 2009 03:47 AM
Filed Under: Economic Development
, Economic Policy
, Gulf
, MENA Region General
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