By Rania Oteify and Tamara Walid
UPDATE 2: Department of finance chief also says reaction to debts 'exaggerated'.
The Dubai government disclaimed responsibility for the debts of Dubai World on Monday, dealing a blow to creditors' assumptions that the Arab emirate would guarantee the conglomerate's liabilities.
"Creditors need to take part of the responsibility for their decision to lend to the companies," said Abdulrahman al-Saleh, director general of Dubai's department of finance.
"They think Dubai World is part of the government, which is not correct."
United Arab Emirates stocks plunged on Monday as investors waited for clarity on Dubai's request for a delay until May 2010 on repaying billions of dollars in debt issued by Dubai World and its Nakheel unit, developer of three distinctive palm-shaped islands in the emirate.
Saleh's remarks in an Arabic-language interview to Dubai TV, a station owned by the ruler of Dubai, came after UAE markets closed.
"They have confirmed there is going to be a restructuring and are doing what they can to differentiate between the government and companies," said Mohieddine Kronfol, managing director at Algebra Capital.
"It doesn't take away from the fact that you have a major potential event that is unravelling. People's expectations aren't going to be met with this announcement."
Pledges of financial support have come from the UAE's central bank, helping to steady global markets.
The central bank promised additional liquidity to local banks and an official in Dubai's oil-exporting neighbour Abu Dhabi said on Sunday it would offer selective support to Dubai firms.
But Michael Ganske, head of emerging market research at Commerzbank in London, said a default, which could ultimately benefit the region, "is becoming more likely."
"At the end of the day it should be positive for Dubai, Dubai's sovereign risk should go down," he said.
Dubai World - which had $59 billion of liabilities as of August - shocked investors last week with news of the standstill request while it restructures, along with its property developer Nakheel. The agreement would affect about $5.7 billion of debt due to mature before the end of May.
Nakheel earlier on Monday asked for three of its Islamic bonds, worth a total of $5.25 billion, to be suspended on Nasdaq Dubai until it was in a position to "fully inform the market".
Saleh made clear on Monday that while the government owned Dubai World, the conglomerate had long operated as a standalone entity and was never guaranteed by the emirate's government.
"It deals with all parties on this basis and it borrows based on ... its projects and not the guarantee of the government," Saleh said.
When contacted by Reuters and asked whether Dubai could still repay its Nakheel bond, Saleh declined to comment.
Dubai World chairman Sultan Ahmed Bin Sulayem also declined to comment on Monday. Other Dubai World officials could not immediately be reached.
John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole Group, said the distinction between the Dubai government and the flagship company appeared minimal.
"What role does the sovereign play? This continues to create uncertainty," he said from Riyadh. "Their motivation is to make a distinction between the two, but the difference ... is nebulous."
Saleh said he believed the market reaction to last Wednesday's announcement by Dubai World, which initially shook global financial confidence, was exaggerated.
"The restructuring is a wise decision that is in the interest of all parties in the long-term but might bother creditors in the short term," he declared.
He doubted the extra liquidity promised by the UAE central bank would be required. "I think banks are not at a stage where they need any extra liquidity from the central bank," he said.
Dubai World is one of the emirate's big holding firms, along with Dubai Holding and Investment Corporation of Dubai. (Reuters)
Reading comments in the press on Dubai Worldâ€™s restructuration is amazing, especially abroad. It appears some talk about Dubai like a country and seem to have no clue about what are the UAE ! There is no doubt the Emirates will work out a solution even if a bit of time is needed to design the most appropriate one. No, the most important fact of these last days is the overreaction following the announcement. This worryingly highlights both the hyper-speculation context and the doubts investors have towards the worldwide recovery. I will focus on the last comments I have recently made on an article from Kenneth Rogoff, a professor in Harvard University titled â€œSo this recession will be different? Donâ€™t bank on it ". Speculation/Hyper-speculation (finance activities) Speculation is part of the market and this is good, especially if there are clear rules on what to do, what not to do. At present, one can ask oneself if: â€¢ It is necessary to have 150 000 or more staff to â€œbetâ€ billions on options â€¢ It is normal to use either finance or customer deposits to â€œbetâ€ these billions â€¢ If short selling brings more positive aspects than negative ones â€¢ It is normal that few players â€œmakeâ€ the market where in other markets, authorities have fought against it for decades and issued fines Reaching the point we are now is not a good sign in the sense that banking clearly lost the link with basic activities, focusing on potential quick and easy money making activities. Otherwise how would most of them have repaid their governmentsâ€™ bailouts? If not through capital raising, surely not with the decline of fees in conjunction with the increase in non-performing loans â€¦ It seems the money from the bailouts has strongly reinforced speculation. Having a look at the recovery of the different market places throughout the world, one can doubt on the fundamentals of this recovery. Stone or sand? So will this recession be different? Yes this crisis could be different from the other ones by the weight and the duration of its negative impacts in the old economies, the younger ones having some potential to overcome more quickly. Impacts could even be stronger due to the apparent hyper-speculation taking place, on the gold for example, and the fact that communication from one side of the planet to the other side is a question of micro-seconds. Small misleading information can become worldwide facts in a few hours thanks to the net. We could have learnt from our 2008 experience but we will probably need to hit a bigger wall and get more pain before we start thinking about what we are doing, why and where we want to head to? These are the questions the world has worked on recently for the climate change. This wiser behavior has to be deployed in some other areas.
This is no hyper-speculation or overreaction! Markets are justified to react this way. I am sure Dubai will come through this. But the way thay have done this, markets are bound to react. We being in the UAE are well aware that the UAE may never allow a default, but do you think the worldover knows about this??? Analysts are treating this as a technical default and market reaction is well justified. On the other hand there has not been anything concrete from Abu Dhabi government as well (yet) other than the Central Bank saying that they are "watching closely".
We being in the UAE are not aware of anything because of the constant misleading press reports. In fact it is the outside world that sees things far clearer than we do. I do not like to get news about Dubai financial crisis from the foreign press but do we have any other alternative. The least said about the local press that reeks of bias the better.
If I enter into a promise to receive money from a bank and pay them back over time, what would happen if I sent them an email before I went on holiday saying that I wasn't going to pay them back any money for 6 months? Do you think that I would be prosecuted and put in jail? There may only be a few stories in the Dubai media about this, but the rest of the global financial media are covering it intensely. Defaulting on scheduled debt places Dubai along Argentina - is this a global ranking that they wish to have? Even if this buys some breathing space, if you were a banker or investor, would you ever lend money or invest with someone who had demonstrated that they won't pay what they owe when they are meant to?
Only fools and ignorant people would compare Dubai to Argentina. Argentina borrowed money as a sovereign state; Dubai's bonds were issued by companies, not the state, and there was never any assurance that the sovereign of Dubai or the UAE can be held personally responsible to make the necessary payments. The rest of the news coming out about Dubai is grossly misinformed and out of touch with reality. Dubai's debts are not $80b, they are actually less because this amount includes the value of land grants given by the dubai government to these corporations, an amount that can be written off with no loss to the Dubai government and thus bring down the $80b. Furthermore, the amount that is actually due on Dec 14th is not $60b, its actually $3.5b. Last but not least; the EU and US have written off more than $1.3 trillion in bad loans over the past 18 months, you're telling me that Dubai's $3.5b (or even $80b) is going to measure up to that? Seriously, this is just another smear campaign against Dubai. Yes, there is money owing, and yes there are legal ways to deal with it, but to spread around misinformation helps no one. Do not compare Dubai to Argentina or to Russia; we are talking about corporations owing money, and not the Government of Dubai (and yes, in the strict legal sense, there IS a difference of responsibility). People who talk about 'honesty' and 'credibility' forget that they come from countries that do not have a clean bill of health on these matters either.
You are incorrect to suggect that it is corporations that owe these monies. The govt of Dubai OWNS these companies. That is fact. I have read many of your recent postings and generally your comments just sweep issues under the carpet or swipe them away as though they are nothing to be concerned about. Mounir, there are issues as a result of this. Your comment that Dubai can not repay a small figure $3.5bln makes the situation worse than if they had to repay the collosal figure of $80bln. This isn't a smear on Dubai in anyway, shape or form...i am just reflecting your comments back to you and nothing else...based on the facts we know and the 'facts' you introduced.
Mounir, "the EU and US have written off more than $1.3 trillion in bad loans over the past 18 months" That would be something. I think you are getting confused between bailouts (where the governments have risked huge amounts but not necessarily lost them) and bad loan provisions by banks.
Mounir, I don't disagree with the points you make your first paragraph, but think that in the rest of your post you are missing the point somewhat. The reason for this reaction is not about the numbers involved. All commentators agree that the actual value of the debt is not that big when considered in global terms, as you rightly point out. However the reaction in the market has come about for a copuple of reasons. 1) Dubai World made the announce critically close to the bond repayment date. 2) There is no denying that, when all is said and done, this is sovereign debt, not corporate debt (no matter what legal seperations you see) and defaulting (or deferring, whichever language you choose) on sovereign debt is always going to get the market jangling. The exposure of most main investors means that the any losses incurred would be hugely irritating, but not terminal to them. However it raises the question of who else in the GCC is in bad shape and also raises the spectre of Dubai facing difficulties in raising finance in the future.
Mounir, I must say I admire your Arab nationalist feelings. But as a fellow Middle Easterner I have to say your endless efforts to find excuses to the current situation is one of the common reasons to our lack of progress in the region. Defending our region from stupid attacks on our way of life is something we all have to do. But we also have to accept our failures, BIT TIME lack of transparency and du process. If others being â€œdishonestâ€ or lacking â€œcredibilityâ€, how dose that allow us to be the same way? How is that related to us being behind and slow in progress compared to some others all the time? Maybe we should ignore others attacking us and instead use our energy to change our systems in order to improve our countries.
Simon: I am not sweeping anything under the rug, im just saying we need to not exaggerate the problem. Yes, we should be clear on the details; and the details are NOT what is being published in most news articles. Dubai does not have debts, Dubai's state-controlled entities have debts. Dubai is not bankrupt, Dubai's state-controlled entities are the ones with the money problems. How about we tell those who try to add things to the mix to stop doing that, before you tell me to stop sweeping things under the rug? The Dubai government owns these companies, but in general business, just because you own something does not mean you are 100% liable for it: dependant on how you structured the liabilities in the company, that could very well be the furthest from the truth! Dod: The United States and the Ontario governments poured billions into GM trying to save it, only to have it declare bankruptcy. Sure, they are now part owners of the new GM, which is MUCH smaller than the one they poured billions dollars into. Where did this money go? It was written off. That is part of the $1.3 trillion I am speaking out. The examples are numerous, but GM is only one example of the write-offs that happened. James: The announcement was made perhaps as a way to measure the market's pulse; and guess what? The markets were not badly affected. They lost a bit on the first day then they regained the loss PLUS added some more gains the day after. This is not a bad strategy, and it has been done by others in the past. As for saying that this is not sovereign debt: what appears to be the case, and what actually is the case, are two very different things. The law will not use the appearance of things: it will go with what is actually written in the contract, and the contract says that this is NOT sovereign debt: Dubai legally is part of the UAE, and the UAE did not issue bonds to investors: Dubai state companies did. See the difference? Dubai has no political or legal independant representation or status in the international community: it is part of the United Arab Emirates; try to take the UAE into court for issuing these bonds: you will lose. The markets did not 'jangle'. They lost on the first day, and regained the losses plus more on the second day. Thats not a jangle. And you are right, this SHOULD raise the question of who else in the GCC is in bad shape, its time that investors do their due diligence before they start investing, no? Dan: I am not finding any excuses; I am not justifying anything and im not trying to sweep anything under the carpet. Bonds are contractual obligations. Contacts involve the law. If we are to discuss bonds while ignoring the law, then we're simply wasting our time. Let us discuss what needs to be discussed with FAIRNESS, something i have yet to see be done here on AB.