naked capitalism

The United Arab Emirates offered a reassuring statement today after sending a bit more tough-minded message yesterday.

The markets will not doubt take heart from the cheery word today, but we need to remind ourselves that the fat lady hasn’t sung yet. Unlike the conduct of banking authorities in the US towards their wayward charges, it isn’t clear that the UAE is prepared to write blank checks to Dubai.

Let’s first look at the somewhat tough talk of yesterday. From the Telegraph:

“We will look at Dubai’s commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts,” a senior Abu Dhabi official said.

Now consider the posture today, per Bloomberg:

The United Arab Emirates’ central bank eased credit for lenders and said it “stands behind” the country’s local and foreign banks as they face losses from Dubai World’s possible default….

U.A.E. banks are already facing rising loan losses stemming from the global recession as the economy slowed and two Saudi Arabian business groups defaulted on at least $15.7 billion of loans. Provisions for bad loans at U.A.E. banks rose to 2.76 percent of the total as of the end of October from 1.92 percent a year ago, according to central bank data.

The U.A.E.’s banking system is “more sound and liquid than a year ago” and local banks’ sale of medium-term notes and commercial paper in foreign markets has declined by 25 percent over the period, the central bank said. Foreign interbank deposits make up only 5 percent of the total, it said.

Dubai World, which owns property developer Nakheel PJSC, the builder of palm-tree shaped islands off the emirate’s coast, has $40 billion of debt, two bankers familiar with the company said Oct. 21, declining to be identified because the information is private. Some $18 billion of Dubai World’s debt is with companies such as port operator DP World Ltd. that have sufficient cashflow to service their loans, the bankers said. The remaining $22 billion is of greater concern, they said.

Yves here. So far, so good, but consider: the central bank support extends to banks, not to Dubai World. That means today’s statement is not necessarily a contradiction of the remarks yesterday. The restructuring of Dubai World still appears to be on, and that in turn appears to constitute a credit event on the credit default swaps that reference the relevant entities.

The Financial Times’ tone was more cautious than Bloomberg’s:

The UAE central bank set up an emergency liquidity facility to ease fears about its banking system, but investors remained nervous about the short-term impact on local markets as regional traders digested the global sell-off caused by the announcement that one of Dubai’s flagship entities – Dubai World – was seeking a standstill deal with creditors until May….

Meanwhile, Dubai World is preparing to persuade bondholders of Nakheel, its real estate unit, to roll over that maturity while the government is planning a charm offensive to repair damage caused by a standstill call that followed months of officials downplaying concerns over Dubai’s ability to meet obligations on its $80bn (£48bn) debt pile.

UAE authorities were in talks with Dubai officials over the weekend to formulate a response to investor fears and limit damage to the UAE economy.

Nakheel is due to pay $4bn on its Islamic bond next month, while the parent company has total liabilities of $59bn.

Bankers have been waiting to see if Abu Dhabi, the wealthy capital that bankrolls the central bank and is key to Dubai’s financial well-being, will intervene. But Abu Dhabi has always insisted that such issues have to be dealt with at a federal level….

Reaction to the central bank’s statement was mixed.

Marios Maratheftis, Gulf economist at Standard Chartered, said the move was positive, with the central bank acting proactively to send “a signal to banks and the world that they are behind the banks”.

Raj Madha, banking analyst at EFG-Hermes, welcomed it as a first step, but said the central bank might have to do more.

And there is a wild card in the mix. Lifted from a comment by RueTheDay in an earlier post:

There is an interesting angle here that isn’t being widely reported in the media, at least not yet.

These “bonds” are actually Sukuks, which are a type of Islamic Finance intended to get around the Islamic law that forbids the charging of interest on debt. They’ve only existed for around 7 years. It’s actually not a bond at all. They create an SPV for the issuing entity that owns all of its assets, the sukuks represent what appears to be an equity interest in the SPV backed by the underlying assets, and the payments are not “interest” but rather “rent” for the use of the assets. No idea what the courts will make of this in the event of a default.

So there is a possibility that this structure will be tested in the default and found to be wanting. And that could redound to all other debt like this. Remember when suddenly no one wanted anything to do with anything that might be tainted with subprime?

Independent of any rescue, a lot of investors and lenders will lose out on the collapse of the Dubai bubble. So the jury is still out on the ultimate costs.

Update 11:00 PM: Reuters, weighing in later, gave an even less positive reading:

But the move to inject liquidity into Dubai’s banks by the central bank of the Gulf Arab state, together with promises by neighboring city-state Abu Dhabi to provide selective support to Dubai companies was seen as by analysts as the bare minimum.