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Wall Street Journal

Don't Count on a Dubai Bailout
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By ANDREW CRITCHLOW
Will oil-rich Abu Dhabi bail out neighbor Dubai, currently groaning under $70 billion of debt racked up its government-owned companies? Don't count on it.

Abu Dhabi's decision last week to pump $4.4 billion into its own banks while offering no support to lenders in Dubai or other emirates in the Gulf federation may simply be brinkmanship amongst the sheikhs. But the possibility Abu Dhabi will refuse to come to Dubai's aid -- once seen as almost unthinkable -- can no longer be ruled out.

That raises the prospect of a deeper debt crisis in Dubai. And even a fragmentation of the 37 year-old federation if Abu Dhabi refuses to pump billions of dollars into the economies of poorer emirates like Dubai to prevent either a corporate default or severe downturn. The cost of insuring Dubai debt has rocketed to around 10 percentage points for five-year debt -- higher even than Iceland.


Getty Images
Construction of new buildings in Dubai, United Arab Emirates. The global financial crisis has taken its toll in Dubai with construction slowing and many projects in the planning stage being canceled.
Dubai's economy is contracting sharply after a 40% slump in property prices, leaving the emirate struggling to refinance $15 billion of debts this year, according to credit rating agency Moody's. Without Abu Dhabi's help, it has little chance of doing so. Moody's says it is likely to downgrade a raft of state-owned companies "if a trend of selective treatment within the federation becomes discernible." And bankers say they won't extend new lines of credit to Dubai without cast iron financial guarantees from Abu Dhabi.

Abu Dhabi is driving a hard bargain. Its demands are thought to include the surrender of Dubai's autonomy and the loss of control over crown jewels such as Emirates Airline and Nakheel, builder of the emirate's Palm-shaped islands. That may be too much for Dubai's ruling Maktoum family to stomach -- partly because the rulers of the two sheikhdoms are cousins. But also, because Dubai contends it was a principle of the 1971 agreement to form the federation that Abu Dhabi would use its oil wealth to support the other emirates.

Abu Dhabi has its own economic worries, thanks to falling oil prices, which account for the majority of the emirate's export earnings. Plus, its reserves have been depleted by the huge losses suffered on its foreign investments, such as the $7.5 billion Abu Dhabi pumped into Citibank in 2007 just before its shares collapsed.

But neither Abu Dhabi nor Dubai can afford to allow this stand-off to drag on. Default by a major Dubai-owned company would trigger a crisis of confidence that could cost the emirate its status as the preeminent center for business in the region. Worse, it could pull on the very fabric that binds the emirates together, destabilizing the entire region.

Write to Andrew Critchlow at [email protected]

Did they really think this expansion could go on forever?
An Emirati, Dubai friend of mine said:" A bird that flys too high, must fall." In other words,:"what goes up, must come down."

It couldn't happen to more arrogant, avaricious bunch of people. I still expect to see Sheik M. at the Lexington Kentucky horse auctions this spring, bidding up prices. I hope he likes to eat horseflesh.

[Never Ceased To Be Amazed]