Aftermath of the Dubai debacle

On Wednesday, last week, a press release issued by the government of Dubai and the Dubai Financial Support Fund took global markets by total surprise when it announced that the ace construction company owned by the emirate - Dubai World would be restructuring its debt obligations. The document says that "as a first step, Dubai World intends to ask all providers of financing to Dubai World and Nakheel to 'standstill' and extend maturities until at least 30 May 2010".

The impact was immediately felt on global markets, even though the Middle East markets remained closed for Eid holidays. However, since then, there seems to be a semblance of sanity being established and the fears that a Lehman Brothers like situation where one announcement followed the other and took the entire global financial sector down, have been allayed at the moment.

"We doubt the issues in Dubai spread further. The foreign currency liabilities of Dubai World (ex Ports) is $22 billion (according to Dealogic), equivalent to some 0.05% of the combined assets of the US and European banks and 4% of their preprovisioning profits," say analysts at Credit Suisse.

Abu Dhabi has $50 billion of annual oil revenue and some $400 billion in its sovereign wealth fund. It thus could easily support Dubai, as it did in February.

Moreover, total foreign claims on the UAE (which includes Dubai) are $123 billion, according to the BIS. This clearly exaggerates the exposure to Dubai, as the BIS data includes SWAPs data and, above all, lending to other UAE states than Dubai. Dubai World has about $25 billion of foreign liabilities, according to Dealogic data ($22 billion if Dubai Ports is excluded, as it has been from the "standstill" announcement). This represents less than 0.1% of the assets of the US and Europeans and no more than 4% of their pre-provisioning profits, they add.

"Our banks team believes that as much as a third of the foreign currency debt might be held by UAE banks, thus limiting the exposure to global banks."

At the moment it is not clear whether UAE sovereign wealth funds would sell assets in order to fund any Dubai bail out (yet, with a standstill agreement, less funds are now needed to bail out Dubai). The key date is meant to be December 14 when the Nakheel $3.5 billion bond matures. Two thirds of these bonds are estimated by our fixed income...