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The Dubai World Standstill

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Dr.Kenneth L. Wise

Senior Non-Resident Fellow -Public Policy

Tag: United Arab Emirates UAE economy
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The UAE faces a challenge that is as much media as it is financial. 
On November 25 Dubais Department of Finance announced a six-month standstill for restructuring the debts of certain subordinate parts of the government-created Dubai World holding company.  Professions of shock and fear reverberated in international news media, financial markets, and currency and commodity markets as well as UAE markets.  The following headlines illustrate the arc of emotion in the early coverage: 
November 26 the Financial Times:  Anger mingles with frustration in Dubai  
November 27, the Wall Street Journal: U.S. futures brace for losses on Dubai debt fallout 
November 28, Bloomberg:  Dubai Crisis May End in Major Default 
November 29, The Sunday Times: Dubai needs to stop the contagion, fast
November 30, Wall Street Journal:  Dubai World:  In Constructive Talks with Banks
The tone of subsequent days coverage became more reflective in general, with occasional expressions of pique or predictions of gloom and even doom.  The Dubai crisis news circled the globe, disrupting markets everywhere for a couple days; it remained current enough to reach headline status occasionally in following weeks.    
Dubai and UAE officials have characterized the media as overreacting; some critical language has been less charitable.  Despite a few but crucial official clarifications of the debt issue, some friction with the press remains. 
Dubai officials contend that everyone should have understood at the outset the difference between government debt and the debt of government investment companies.  When Dubai spokespersons later distinguished between offering assistance to distressed companies and covering companies' debts they thought this would limit the damage to Dubais reputation.  It has, some, but not fully. 
In defence of these officials, the following is true:  all loan and bond prospectuses issued by Dubai companies and the Dubai government itself clearly stated at the time of posting that the government is not accountable for the debts of the government-related companies and vice versa.  It was no secret then that, in legal terms, the Dubai government and the enterprises that it had helped to create and owned parts of were separable.  Every bond buyer and banker and insurer and rating agency knew. 
Thus the endless stories over the last 18 months saying Dubais debt is $80 billion made the entire debt the government's.  This misled readers.  This description of the debt did not prepare readers for the crunch to come.  Hence many immediately interpreted the November 25 announcement as the insolvency of a sovereign entity.  Even ratings agencies came close to saying the same. 
Misunderstanding about these debts arose in part because commentators had never given weight to this separation and because from the beginning of the global economic downturn lenders had engaged in wishful thinking.  Conventional wisdom continually held that the Dubai government would cover any liabilities of the government-related companies in which it had a stake and that Abu Dhabi or sovereign wealth funds or the UAE federal governments oil money would back the Dubai government. 
That the UAEs Central Bank bought all of the first $10 billion in bonds that Dubai government offered in February deepened observers faith in this bailout sequence.  Dubai government used its bond infusion to cover some of its municipal expenses and to loan to selected enterprises to assist them in paying debts to contractors.  
On November 25 Dubai government also announced sale of an added $5 billion in bonds.  That these went to two Abu Dhabi government-backed banks instead of private investors surprised a few observers; it contributed to the image that because no international lender was willing to back it, Dubai government itself might be going broke.  This attitude completely overlooked Dubais successful sale the previous month of both Islamic and dollar denominated bonds and that its portion of the talked-about debt was around $20 billion, not $80 billion or more. 
The rivalry story also contributed to the media claim of surprise in an indirect but critical way.
Though Dubai and Abu Dhabi, and occasionally other emirates, may indulge in competition the way the parts of most federal systems do, they all understand that the UAE as a whole would not benefit from any one emirate becoming ascendant.  The federal system energizes the country. 
Yet in the early days of the global financial difficulties, a darling of the UK pressa professor who had taught in the UAE for a few yearshelped to popularize the idea that Dubai and Abu Dhabi were rival emirates who wished each other ill. 
In response, trying to squelch this idea and sustain confidence in the UAE, leaders of both Abu Dhabi and Dubai repeatedly stressed that the UAE economy was recovering well and that Dubai and Abu Dhabi were brothers.  
These assurances contributed to lenders thinkingwishful or willedthat gave media an impression that no one in these emirates had any worries. 
For example, throughout 2009 all observers knew that the first important repayment deadline for a Dubai World subsidiary, Nakheel, would be December 14.    Referring to repayment of this nearly $4 billion sukuk borrowing as an impending test for all of Dubai became commonplace.  But most in the media, accepting the combined leaders confident tenor, predicted that Dubai would pass the test.  (Only a lonely analyst here or there noted that Dubai government did not owe this debt.)
Ratings agencies apparently also fell prey to wishful thinking. 
Then came November 25. 
Members of the British press were especially critical in much of their commentary on the Dubai governments announcement of a standstill on Dubai World debt payments.  Many of the UK's correspondents in the UAE who had been reporting the Dubai leaders and lenders all is well assurances at face value may have received strident calls from their editors in London.    Neither journalists nor editors like being led down a garden path. 
That several UK banks suddenly perceived billions of pounds at great risk increased their sense of distress, even anger.  This they conveyed to the media. 
Dubai government officials apparently had failed to discuss the impending Dubai World announcement with international reporters or creditors beforehand; and on the heels of the announcement they promptly closed their doors to go on Eid holiday.  This period of closed doors flowed with no significant break into celebrating National Day.  As a result, ten days of near silence allowed news of a Dubai crisis to run free.  This encouraged many interested persons and groups outside of the UAE to express shock. 
Media were in shock because this event disassembled their previous assumptions and good news reporting. 
Lenders took advantage of this Dubai silence and the earlier wishful thinking about government backing to stir fear through media stories to increase their bargaining ability in the last round of negotiating about Nakheels December sukuk and Dubai World restructuring. 
The Dubai World standstill unfortunately gave some credence to widely-read pieces of sloppy journalismand lazy newsroom plagiarismpublished about Dubai in the last two years.  Some standstill stories mixed in all these Dubai myths:  fleeing expats (former real estate sellers), abandoned cars and debts, dying city, etc. 
The resulting impression in the news was of a Dubai crisis.  International anxiety that continually questions the strength of global recovery combined with inadequate media management in Dubai to turn a rather normal rescheduling of company debt into a higher risk situation than necessary. 

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