Thread: Dubai Debt Woes Raise Fear of Wider Problem

Background: No Thanksgiving for Investors, Dubai's Debt Woes Rattle Stocks Around the World
http://www.alipac.us/ftopict-179513-dubai.html

Includes second article, "If Countries Like Dubai Begin to Fail, Who Is Going to Save Them?" by Jeremy Warner.

Dubai Debt Woes Raise Fear of Wider Problem

By LANDON THOMAS Jr.
Published: November 27, 2009

Of the many economies that gorged on debt in the boom years, Dubai stood out. In the space of a few years the emirate’s investment arm, Dubai World, racked up $59 billion in debt, borrowing to build lavish developments like a giant island shaped like a palm tree to entice celebrities like Brad Pitt, and to invest in glittery properties like the MGM Grand Casino in Las Vegas.


Chris Jackson/Getty Images
The Emirates Towers in Dubai, which has accumulated $59 billion in debt.

Kamran Jebreili/Associated Press
Golfers in the shadow of Jumairah Island Towers on Friday in Dubai. Fear that the emirate cannot pay its debt sent the Dow down more than 150 points.


Now that the boom has gone bust, both in Dubai and in the United States, Dubai is stuck with a glut of real estate that no one wants to buy or rent. Creditors and markets had always assumed that when push came to shove, its oil-rich neighbor Abu Dhabi would bail out Dubai. But that assumption was called into question this week, and the resulting fear that Dubai might not be able to pay its bills sent a wave of uncertainty rippling through markets just as investors thought the worst of the global financial instability was over.

The anxiety reached Wall Street on Friday, sending the Dow Jones industrial average down more than 150 points, as investors worried about hidden debt bombs in other countries and institutions — heavily indebted nations like Greece and even Britain, high-flying emerging markets and even European and American banks that had lent Dubai money.

In a worst-case contagion, Bank of America analysts wrote Friday, “One cannot rule out — as a tail-risk — a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s.â€

Nov 29, 6:38 AM EST

Report: Indebted Dubai World rejected asset sale

By BARBARA SURK
Associated Press Writer

DUBAI, United Arab Emirates (AP) -- Dubai World "totally rejected" the possibility of selling off some of its top performing assets in the months before the heavily indebted conglomerate turned to creditors with a plea to defer payments on some of the $60 billion it owes, a newspaper reported Sunday.

The company, whose holdings range from ports to real estate, shocked world markets on Wednesday with an announcement that it would seek, until at least May, a deferment on its debts and those of its real estate arm, Nakheel PJSC. That subsidiary has a $3.5 billion bond coming due next month.

The announcement was the clearest indication yet that the conglomerate, which has been a primary engine behind Dubai's meteoric growth over the past decade, was in way over its head in terms of debts. The company's obligations alone account for the overwhelming majority of the at least $80 billion Dubai owes to creditors.

Dubai World "totally rejected the idea of selling some of its good investment and real estate assets at low prices," a company official was quoted as saying by Al-Itihad newspaper on Sunday.

The official said that any asset sale needed to be in a "commercially fair manner in order to achieve (Dubai World's) long-term strategic objectives, away from ... economic pressures."

The statement in the newspaper adds little in the way of explanation as to how company officials, and indeed Dubai's ruling family, planned to tackle a debt crisis that could destroy the reputation of Dubai Inc., as the city-state's government-affiliated businesses are known.

Dubai officials have headed down to neighboring Abu Dhabi, ostensibly to discuss the debt issues, and expectations are that the United Arab Emirates' central bank will issue some sort of statement on Monday.

The company had said last week that it was seeking the delay as it continued its restructuring - a plan under which it has already laid off 15 percent of its work force in a bid to streamline costs.

The opaque wording of the company's announcement for a payment extension was amplified by its timing - coming on the eve of a three-day Islamic holiday in which markets in the region would be closed and officials largely unavailable.

The news was a blow to the reputation of Dubai, once seen as the Gulf Arab region's answer to Las Vegas, Wall Street and Los Angeles rolled in one.

With little oil, the emirate - one of seven semiautonomous city-states making up the UAE - focused its growth efforts on finance, tourism and real estate. It bankrolled that dream, which included indoor ski-slopes, man-made islands and the world's tallest tower, on cheap credit and borrowed time.

A sale of the company's assets is one possibility being floated by analysts to cover the debts. But the more likely scenario being discussed is that Abu Dhabi will engineer another bailout - even partial - in a bid to minimize damage to the country's bank and the economy.

Several UAE banks are on review by international credit agencies for their exposure to Dubai World's debts.

The announcement came in tandem with another from Dubai's government that two banks majority owned by neighboring Abu Dhabi - the oil-rich home to the United Arab Emirates' federal government - had fully subscribed a $5 billion bond issuance.

That issuance was part of a broader $20 billion bond program launched earlier this year to help Dubai meet its mounting debts. The UAE's central bank had already bought $10 billion in bonds, but officials were quick to say that the latest issuance was not linked to Dubai World's problems.

http://hosted.ap.org/dynamic/stories/M/ ... TE=DEFAULT

Can Dubai's energy reserves pay off its $80 billion in debt?

Peter Cohan
Nov 28th 2009 at 1:00PM

The Dubai debt default seems to have inspired a bit of fear in the U.S. But is there any real reason for it? U.S. banks have minimal exposure to Dubai's debts -- most of the banks that would suffer if Dubai defaulted are located in the Middle East. Nevertheless, U.S. markets fell 1.7% Friday during a holiday-shortened trading day -- after futures suggested the market would be down 2.7%. But if Dubai's oil reserves exceed its debts, it could sell oil to repay them.

The extent of Dubai's energy reserves is in dispute. The New York Times reports that Dubai's oil reserves are minimal, noting it "is one of the few member states of the United Arab Emirates [UAE] that has little oil wealth of its own." (Dubai is one of seven emirates that together make up the UAE.) Yet other sources suggest Dubai has significant oil and gas reserves -- worth $311.4 billion at today's prices -- a figure that does not strike me as minimal in light of Dubai's $80 billion in debt

How so? Dubai has 4 billion barrels of oil in reserve, which represents 4.1% of the UAE's 97.6 billion barrels as of January 2007, according to the Energy Information Administration. Dubai also has 2% of the UAE's natural gas reserves, according to the UAE government. The Energy Information Administration estimates that the UAE's gas reserves totaled 214.4 trillion cubic feet (TCF). The $311.4 billion consists of $296 billion in oil (4 billion barrels @ $74/barrel) plus $15.4 billion in gas (4.29 TCF at $3.60/thousand cubic feet).

I don't know whether it's legally possible for Dubai to do this, but if it wanted to pay off its $80 billion in debt today, it could theoretically do so nearly four times over by selling oil and gas reserves and using the cash to repay its lenders.

As things stand, Bloomberg News reports that the UAE has decided to repay borrowers selectively on behalf of Dubai. While the facts about Dubai's problems may not have been disclosed fully, if the EIA's data are correct, Dubai has the energy assets it needs to pay off its obligations -- and if Dubai can't sell enough of those quickly, the UAE's energy resources are at least 25 times greater.

Foreign banks have a total of 0.4% of their total cross-border exposure to the UAE, according to the Times, which seems small to me. So unless there's some enormous surprise out there from the UAE that the markets don't know about, this Dubai debacle strikes me as an over-reaction.

Peter Cohan is a management consultant, Babson professor and author of nine books, including Capital Rising (due in June 2010). Follow him on Twitter. He has no financial interest in the securities mentioned.

http://www.dailyfinance.com/2009/11/28/ ... n-in-debt/

WHY DUBAI DEBT SHOULD MATTER TO YOU: US REAL ESTATE COULD TAKE A BIG HIT

Charles Feldman
Nov 28th 2009 at 1:00PM

Funny thing this globalization: Just when you think everything is starting to settle down and maybe everything is starting to settle down and maybe, just maybe, the world's economic plight is finally on the mend, along comes news from a place such as Dubai that threatens to send everything into a tailspin all over again.

Stock markets have already felt the shock waves from the news that Dubai's state-owned investment arm--Dubai World--needs to restructure its debt...a fancy way of saying, it simply can't pay its bills. Bills, by the way, that come to some $59 billion. And, there is no app to download that can easily fix that!

But, as Reuters reports, the bigger worry now is what Dubai's debt might do to the property market in the United States where commercial real estate is already on shaky ground, right alongside residential real estate, in most parts of the country.

Following news of Dubai's economic woes Friday, the Dow Jones U.S. Real Estate Index nosedived by 2.9%--or as Reuters correctly reports, "nearly twice the decline of broader U.S. market indexes."

And, it is easy to see why: Dubai World has a big stake, along with MGM Mirage, in the huge Vegas CityCenter project. An arm of Dubai World also has substantial investments in everything from the Mandarin Oriental and W hotels to the newly re-opened Fontainebleau in Miami Beach.

Says Sam Chandan, the chief economist at Real Estate Econometrics in New York, and quoted by Reuters, "It has the potential to spill over into the broader perception of real estate development and real estate as being a very risky area for exposure."

This could have the effect of driving real estate prices down more than they have been already.

Unfortunately for the fledgling, and still unproven, world economic recovery, what happens in Dubai doesn't stay in Dubai!

http://www.walletpop.com/blog/2009/11/2 ... =main|html