Dubai World “Default” — An Alternative View

In Uncategorized on 04/12/2009 at 11:30 am

Yesterday a senior writer in BT vented the conventional outrage about Dubai. “HERE’S how not to communicate you’re in a financial hole: Put out a terse statement asking for a six-month payment moratorium on US$60 billion of debt that you owe, and then promptly close shop for a four day public holiday.

I beg to defer. If you were a debtor who knew his Keynes ( “If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours.” ) wouldn’t you want your creditors to see reason by showing them the consequences of their unreasonableness?

“That is what Dubai World did last Wednesday. It scared the daylights out of the markets and, in the absence of any further information, triggered all manner of paranoid speculation. Is Dubai itself going bust? Will there be contagion? Who will be next? Can already weakened banks withstand this?” (BT)

So Dubai Inc. succeeded in showing the creditors why they should be reasonable: they could lose everything by being unreasonable. Don Corleone would be proud.

Then after helping them see reason, wouldn’t you want to show them that things are not that bad? That the debt to be restructured was only US$26 billion, not US$60 billion.

Well that’s what Dubai Inc. did “Thereafter, Dubai World, which has operations spanning property, ports, infrastructure and much else, tried to reassure everyone that things actually aren’t so bad. It revealed that it plans to restructure only US$26 billion of its debt. Moreover, many of its assets are on a ‘stable financial footing’ such as Dubai Ports World, the Jebel Ali Free Trade Zone and the investment arm Istithmar, and these would not be part of any deal; the restructuring will apply only to the dud assets, mainly property.” (BT)

And wouldn’t you want to remind the creditors that that the problem is theirs, not yours?

This is what Dubai Inc. did “After the emirate finally emerged from its holiday this week, Dubai’s government made clear that it will not stand guarantee for the debts of Dubai World, even though the latter is a state-owned conglomerate.”*. With support from Abu Dhabi who “indicated, ever so cautiously, that it will consider providing financial support for Dubai World, but only on a ‘case-by-case basis’.”. (Quotes from BT).

All in all, the way Dubai Inc. handled the issue shows that the big Western banks can be jerked around by debtors with attitude. BTW, Dubai World’s adviser is a house that many in the City of London, and New York still think of as a Jewish house: Rothschild.

After all as the BT writer acknowledges after some caveats, and gnashing of teeth, “Eventually, however, Dubai will be back as a vibrant business and financial centre. It has the location, it has the connectivity and it has the DNA that no other city in the Gulf can come close to matching.”.

The Arabs of Dubai Inc. have the right attitude towards banks and other international creditors: the latter have short memories, and not much scruples. If you are rich, they will do business with you.

Finally a wicked thought. Someone unscrupulous in the know could have made a fortune: shorting on Thursday and Friday when Dubai was closed. And covering back after Dubai Inc. clarified its initial announcement. But that would be taking cynicism too far.

* Would the writer say the same of Temasek, Keppel or any Singapore GLC? One suspects not .


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