Abu Dhabi Comes to the Aid of Dubai with $10 Billion Bailout

Dubai has received a $10 billion bailout from Abu Dhabi, its neighbor and fellow state within the United Arab Emirates (UAE), to assist it with debts that include a $4.1 billion Islamic bond maturing on Monday.

There was recently a panic on the world markets when it was announced that Dubai World, a holding company controlled by the government of Dubai, had asked its creditors to allow it six months in which to restructure debts of $26 billion, its total debt burden being $60 billion. But now many of those same markets have seen massive jumps in Monday trading following the announcement of the aid being provided by Abu Dhabi, China Daily confirms that in early trading the Dubai Financial Market's main index rose by 10.1 percent and Abu Dhabi's stock market by 7.4 percent, part of which will be used by the division of Dubai World concerned with property development, Nakheel, to repay the $4.1 billion Islamic bond which matures on Monday. Indeed the bond payment due to be made by Nakheel appears to be the principal reason for the funding provided by Abu Dhabi, whose oil reserves are much greater than those held by Dubai, with Fahd Iqbal, an analyst with Middle East investment bank EFG-Hermes, observing:

This announcement constitutes a specific bailout of Nakheel, suggesting that as an entity (it) was deemed to be 'too big to fail". It does not, however, constitute a bailout of Dubai Inc. or Dubai World as a whole and this is important to highlight

Reuters quotes another source within the financial sector as saying that the predicament in which Dubai finds itself could impact on Abu Dhabi and therefore it was in the interests of the latter state to provide the bailout, which the source, John Sfakianakis of Banque Saudi Fransi-Credit Agricole, believes will have strings attached. Following the settlement of the bond on behalf of Nakheel the remainder of the $10 billion bailout will be allocated to interest expenses, working capital and payments to "existing trade creditors and contractors", CNN reporting that the plan is for the remaining bailout funds to last until April 30 2010. And Sheik Ahmed bin Saeed Al Maktoum, chairman of the Dubai supreme fiscal committee, has spoken of there being a condition to the provision of the funds, but that condition is being imposed by the Dubai government on Dubai World, there being no indication as yet of any condition imposed by Abu Dhabi. The condition is that Dubai World must successfully negotiate a delay to the repayment of some of its debt. According to China Daily Sheik Ahmed bin Saeed Al Maktoum said in a statement:

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. Our best days are yet to come

In another development the Dubai government, which is apparently likely to have an asset sale in order to raise more funds, confirmed that a new bankruptcy law will come in to effect on December 14. Although it is emphasized that Dubai World has no plans yet to file for bankruptcy the new law will be available if the holding company cannot "achieve an acceptable restructuring of its remaining obligations". The central bank of the UAE is reportedly willing to provide local banks with the support they need to come through the current crisis in what is the most heavily populated of the seven emirates within the UAE.