Worries that Dubai washing its hands of debt woes

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Worries that Dubai washing its hands of debt woes

By BARBARA SURK and TAREK EL-TABLAWY, Associated Press Writers Barbara Surk And

Tarek El-tablawy, Associated Press Writers – Mon Nov 30, 6:01 pm ET

DUBAI, United Arab Emirates – If global investors were looking for reassurances

from Dubai that it would stand behind its massive, debt-swamped investment

conglomerate, they got none Monday. Instead, the Gulf city-state seemed to wash

its hands of the financial woes that have rattled world markets.

The muddled message from Dubai has fueled worries over a possible default by the

conglomerate, which is involved in projects around the world — from Gulf banks

and ports in 50 countries to luxury retailer Barneys New York and a grandiose

six-tower hotel-entertainment complex in Las Vegas.

Many investors are hoping that the conglomerate, Dubai World, will either openly

discuss restructuring of some $60 billion in debt with its creditors, or that

Dubai's larger, oil-rich neighbor, Abu Dhabi, will step in to restore confidence

by promising to foot any bills.

Dubai and Abu Dhabi are the most powerful of the seven highly autonomous

statelets that make up the United Arab Emirates, but their sharply different

styles have long made them rivals. For any help, Abu Dhabi will likely demand a

price, possibly including increased say over Dubai's affairs.

Abu Dhabi, the seat of the UAE's federal government, has been the more

conservative, religiously and financially, relying on its oil wealth to fuel

growth. Meanwhile, smaller Dubai — without any oil resources — has for the past

decade been the freewheeling boomtown, racking up debt as it built extravagant

skyscrapers, artificial residential islands and malls complete with indoor ski

slopes.

Government-owned Dubai World has been the engine for much of that growth at home

and abroad. So it was a bombshell last week when Dubai announced that the

conglomerate wanted to defer debt payments until at least May.

The United Arab Emirates' two main stock exchanges registered record declines

Monday as they opened for the first time since the announcement, after a long

Islamic holiday.

The Dubai Financial Market was down 7.3 percent, while Abu Dhabi's bourse was

off over 8 percent. Brokers said they hadn't seen such declines in at least a

year.

Mohammed al-Ghussein, managing partner of Atlas Financial Services in Dubai,

summed up the day's trading, saying, " The whole screen is red, regardless of the

industry. "

Global markets leveled after heavy drops last week. Investors appeared to have a

better sense of the size of potential losses from Dubai and were reassured for

the moment that its woes don't signal a new crunch for credit markets, still

recovering from last year's near-shutdown.

But the impact from Dubai's comments Monday could rekindle the same concerns.

Investors with strong exposure to Dubai had the sinking feeling that not only is

Dubai sticking to the opaque ways that many feel helped cause the mess, it was

continuing to deny the city-state even has a problem.

Dubai officials have largely been silent since last week and, when its top

financial official made his first comments Monday, it was hardly reassuring.

Abdulrahman al-Saleh distanced the emirate from Dubai World's debt, saying that

while the conglomerate was government-owned, it was " established as an

independent company. "

" Given that the company has various activities and is exposed to various types

of risks, the decision, since its establishment, has been that the company is

not guaranteed by the (Dubai) government, " he said on Dubai TV.

Moreover, lenders should take some of the responsibility for the problems, he

said, arguing that they lent money to the company on the basis of the

feasibility of its projects, not on assurances provided by Dubai's government.

Further fueling the confusion from Dubai authorities, the only other official to

speak out about the debt mess was the emirate's police chief, Lt. Gen. Dhahi

Khalfan Tamim.

Tamim said Dubai faces " unfair competition " aimed at " the defiling of the

emirate so that it will not be a hub for finance, work or foreign investment. "

He said the Dubai government's debts " are not worth mentioning " and shouldn't be

confused with those of local companies.

Dubai World broke its silence in a pre-dawn announcement Tuesday.

The company said in an e-mailed statement from the Dubai ruler's media office

early Tuesday that " constructive " discussions have begun with banks. It said the

restructuring would include about $6 billion covered by Islamic bonds issued by

its Nakheel subsidiary. Nakheel, which is the real estate developer famous for

building Dubai's palm tree-shaped islands, has a roughly $3.5 billion Islamic

bond coming due in two weeks and it was considered the litmus test of Dubai

World's debt woes.

The conglomerate emphasized that the proposed restructuring would not include a

number of its other portfolio companies, including Infinity World Holding,

Istithmar World and Ports & Free Zone World.

While the statement offered the first taste of clarity for a financial world

eager for some transparency, it did not deal with the broader issue of how the

company and Dubai itself would deal with the overall debt.

One possibility is that Abu Dhabi will step in, more to salvage the UAE's

creditworthiness and economy than out of any filial or legal obligation to

Dubai. Abu Dhabi's rulers appear to be furious over Dubai's handling of last

week's debt announcement, showing it by remaining silent amid the crisis.

" Abu Dhabi's leaders have long viewed Dubai's economic growth model as

excessively risky, and they now feel vindicated, " Hani Sabra, a Middle East

expert with the New York-based Eurasia Group, wrote in a recent report.

But it also can't allow Dubai or Dubai World to fail. " Some of Dubai's largest

creditors are domestic Emirati banks in Dubai and Abu Dhabi, and Abu Dhabi does

not want Dubai's troubles to spook international investors away from the UAE as

a whole, " he said.

In a move to partly allay liquidity concerns, the UAE's Abu Dhabi-based central

bank on Sunday reaffirmed it was standing behind local and foreign banks in the

country by offering additional funds at a low cost.

The move was ostensibly to ward of a run on the banks. The conglomerate, alone,

is responsible for about 75 percent of Dubai's at least $80 billion in

liabilities.

Abu Dhabi could earn additional political leverage by stepping up.

Intervening " gives Abu Dhabi the leverage it needs to extend its influence more

broadly across the UAE federation, " wrote Sabra.

" Abu Dhabi wants to get the message across that it will not simply write blank

checks, " he said. " In the medium and long term, Dubai's financial model will

change to look more like Abu Dhabi's as Dubai's rulers lose political clout. "

___

El-Tablawy reported from Cairo and AP Business Writer Adam Schreck contributed

from town, Malaysia.