Tuesday, December 15, 2009

Dubai Respite

A last-minute infusion of cash keeps the glitzy city-state from plunging deeper into crisis. Dubai got a $10 billion lifeline from oil-rich Abu Dhabi to save one of its prized companies from imminent default Monday, calming fears for now about the city-state's shaky finances. Dubai's main stock market spiked more than 10 percent on the news.

Dubai World -- a sprawling conglomerate with assets ranging from the ocean liner Queen Elizabeth 2 to luxury retailer Barney's New York – had been up against a Monday deadline to repay a pile of loans from its Nakheel property division. Some $4.1 billion of the emergency funds will be used to pay off those bills. The rest will go to shore up Dubai World itself.

The bailout is the latest by Abu Dhabi. The emirate which controls the UAE's presidency has directly and indirectly provided Dubai with $25 billion over the past year, mostly by buying Dubai bonds. In all, Dubai owes more than $80 billion – roughly equal to its total economic output last year. The full extent of its liabilities is unknown, however, with some analysts putting the total at $100 billion or more.

The aid package is key for Dubai, the second-richest of the UAE's city-states but which has little of the oil wealth held by Abu Dhabi. Dubai's ruler is the UAE's vice president and prime minister.

Dubai created Dubai World – which has interests in seaports, real estate, tourism and retail – to diversify its economy and boost its international clout. Much of the growth was fueled by easy credit. As the bills came due, Dubai struggled to repay as its economy was battered by the global economic downturn.

Investors cheered the news, which provided some clarity in a crisis that erupted late last month when the conglomerate unexpectedly said it was seeking new terms on repaying roughly $26 billion of its debts. Whether this support is just a one-time lifeline or if it will continue as long as Dubai needs it, when it needs it – remains uncertain. But this support is very timely.

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