On Wednesday last week, two of Dubai’s biggest companies, Dubai World and Nakheel, asked creditors for a six-month delay in paying creditors on nearly US$60 billion of debt, out of which US$22 billion has to be refinanced by 2011. Technically, this is as good as a payment default of their debt.
Stock markets around the world reacted negatively following the news of Dubai’s debt crisis. A flight to safety from riskier assets could see an unwinding of the USD carry trade.
Dubai makes up one of the 7 Emirates of the United Arab Emirates (UAE). By itself, it has very few energy resources and relies heavily on one of its oil rich neighbor, Abu Dhabi, for funding.
The past years have seen money pile into many infrastructure and construction projects like The World or Palm Jumeirah in Dubai. Following the global crisis last year, Dubai’s property market has been severely hit just like many other countries around the world. Dozens of major projects have been shelved.
Abu Dhabi had earlier lead a bailout of US$10 billion to Dubai in February this year.
The fact that Abu Dhabi has not come immediately to the aid of its sister Emirate Dubai raises concern and uncertainty although most analysts expect them to come to Dubai’s aid eventually. The impact of whatever aid they give to Dubai on other creditors remains to be seen.
The next important milestone to watch will be a US$3.52 billion bond due 14th December 2009 by Dubai World’s troubled real estate division, Nakheel. If Abu Dhabi does not come in with a rescue, the default will be a replay of the Argentina or Russia debt default.