Dubai waits on debt aid from oil-rich neighbour

Abu Dhabi has the cash and cachet to be Dubai’s white knight – in a Gulf version of a too-big-to-fail bailout or to help calm markets with promises to intervene if Dubai’s fiscal mess deepens.

The direction Abu Dhabi takes will probably set the tone for the coming week as analysts try to sort out what banks and institutions have the most at stake in the money crunch.

The crisis has suddenly shifted Dubai’s image from a desert dream factory of indoor ski slopes and a “seven-star” hotel to a reckless spender sideswiped by the recession and unable to pay its bills.

Ruler Sheikh Mohammed bin Rashid Al-Maktoum, had only this month assured international investors that all was well with Dubai’s finances and told media critics to “shut up”.

Dubai’s empty pockets – mostly drained by collapsing property prices and overambitious development plans – sparked panic selling across world markets on fears that the reckoning from the global recession is not over.

In a surprise announcement on Wednesday, Dubai said it wanted a six-month delay in paying creditors on nearly £36bn (€39bn) in debt held by its main development arm, Dubai World, whose holdings range from port operations around the world, Dubai’s iconic palm-shaped island and the luxury retailer Barneys New York.

The next tranche was a £2.1bn (€2.3bn) bond due on December 14 by Dubai World’s troubled property division Nakheel.

On Friday, the Dow Jones industrial average suffered its biggest drop in nearly a month – closing down 154.48, or 1.5%, to 10,309.92, in a shorted trading day because of the Thanksgiving break.

Asian exchanges fell sharply for a second day, but European markets bounced back on confidence that the Dubai damage would not spread to other Gulf economies.

Dubai and other Middle East financial markets reopen tomorrow after an Islamic holiday.

But much attention will remain on Abu Dhabi’s response. It stepped in earlier this year with a £6bn (€6.6bn) bailout for Dubai when the first blast of the recession hit.

An editorial in The National newspaper – which is bankrolled by Abu Dhabi and closely reflects the opinions of its rulers – said Dubai’s infrastructure was sound and pointed out General Motors’ revival after receiving a US-backed bailout in comments that suggested an unchecked Dubai meltdown could harm the entire country.

“Confidence is a fragile commodity,” said the editorial.

Yet Abu Dhabi’s largesse may be reaching some limits. On the same day that Dubai announced its debt “standstill”, two Abu Dhabi-controlled banks bought £3bn (€3.3bn) in Dubai bonds for a stop-gap cash infusion, but went no further.

“I guess Abu Dhabi is saying there will be no blank cheque for Dubai,” said Jane Kinninmont, a London-based specialist on Gulf economies at the Economist Intelligence Unit.

What Abu Dhabi could get for its money, however, is greater long-term influence over Dubai’s development policies.

Christopher Davidson, an expert in Emirate affairs at Britain’s Durham University, wondered if Abu Dhabi wanted to become too deeply involved in lifting Dubai from its fiscal wreckage.

“There is no point throwing good money into Dubai’s black holes,” he said. “These are mistakes of Sheikh Mohammed and he needs to deal with them.”

Dubai crash-landed about a year ago as the global economic downturn ended a sizzling property boom, which saw prices skyrocket and investors lining up for new projects. The state-backed Dubai World led the charge with a catalogue brimming with ever-bigger ideas and the bold motto: “The sun never sets on Dubai World.”

Some were completed before the bubble burst, such as the Palm Jumeirah island that included a Hollywood A-list opening of the Atlantis resort in November 2008. But dozens of major projects, including entire mini-cities in the desert, have been shelved.

Abu Dhabi’s strategists are expected to dig deeper into Dubai World’s books before deciding their next move, analysts say.