The ticking time bomb in Dubai finally exploded late last week.
On the eve of their most important Muslim holiday, which happened to coincide with the eve of Thanksgiving in the west, Dubai authorities made two statements spaced a few hours apart.
The first– that the heavily indebted, government-owned flagship holding company Dubai World had successfully raised a few billion dollars. Investors collectively exhaled, temporarily relieved that the company would be able to make good on its colossal debt payments.
The second statement came only hours later: Dubai World announced that it was asking creditors for a standstill on its outstanding debt… in other words, everything freezes– no more payments.
It’s a real life example of the adage, “If you owe the bank $100K and can’t pay, you have a problem. If you owe the bank $100 million and can’t pay, the bank has a problem.”
In Dubai’s case it’s around $80 billion.
Default and debt restructuring occur all the time, especially in the worst downturn of modern history. The part that stings investors about Dubai, though, is the utter lack of transparency and potential subterfuge. For months, the emirate has been reassuring investors that it would be able to raise money and make its debt payments.
Even Dubai’s ruler, Sheikh Mohammed gave worried investors the “talk to the hand” earlier this month, insisting that Dubai World (essentially his personal holding company) would be well capitalized and supported by Abu Dhabi, its rich neighbor.
Just a few weeks later, after months of tap-dancing, Dubai finally pulled back the curtain and confirmed investors’ fears– it had run out of cash. The nonchalant, innocuous way in which it was handled, however, will continue to infuriate investors for a very long time.
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2009-11-30
