Last updated: December 14, 2009 6:45 pm

Dubai World

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Shukran, Abu Dhabi, thank you. Dubai’s wealthier neighbour will, after all, bankroll the emirate’s largest state-owned conglomerate and stave off default. In an apparent change of heart, it has made a $10bn down payment to tide over Dubai World until April.

The parallel with Greece, another state that has lived beyond its means, is striking. Just as the United Arab Emirates was expected to back Dubai World and its quasi-sovereign risk, so the European Union and European Central Bank may yet support Athens – protests from Brussels and Frankfurt about Greek profligacy notwithstanding. Moral hazard is being writ large in the Gulf, and perhaps in Europe too.

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The scale of the support proffered to both countries is huge. Greek banks have posted some €42bn at the ECB as collateral for cheap loans, used to support domestic lending. That is equivalent to 17 per cent of Greek gross domestic product. Dubai, meanwhile, has received some £25bn of support from Abu Dhabi, equivalent to about a third of the emirate’s GDP. There are big differences of course. The support to Dubai is to help the balance sheet of an overstretched quasi-sovereign company; that to Greece to help lending within a state. But in both countries the terms under which this help might be withdrawn are unclear. In Greece, ECB rules that require collateral to have a certain debt rating may be changed. In Dubai, the concessions that Abu Dhabi may require have not been made public. Both leave room for discretion.

Of Abu Dhabi’s latest $10bn injection, just over $4bn will be used to settle Nakheel’s Islamic bond. Much of the rest is to pay Dubai World’s trade creditors and contractors. This buys Dubai time, but hinges on creditors agreeing to a restructuring. If that fails, a new bankruptcy law will roll into action.

All this is designed to limit the fallout. Indeed, Dubai is sticking by its ambition to be a global financial centre. “Our best days are yet to come,” it says, which might be comic if it were not so sincere.

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