Tuesday, December 1, 2009

The Dubai World Debt: A perspective from Dubai.

In moments of crisis, especially financial ones, bankers tend to seek the shortest distance to the source they think can pay them off best, and ofcourse, with the least of hassle. While I have offered my perspective on the way the Dubai World matter was handled, or mishandled, I may have come across as rather 'soft' of the bond holders and the debt holders. While some may suggest that Dubai Worlds handling of this debt saga is more akin to the way someone might be handling their credit card debts but shuffling around payments to keep every card issuer happy, they have, till yesterday, actually failed more on public relations side of the story.

For bankers, on the other hand, they have found an unlikely ally in the media who have questioned why the Dubai Government or indeed Abu Dhabi do not step in. Both miss a crucial point. If support, financial or in the shape of explicit guarantees, comes from these sources then it should be the choice of Dubai government rather than something the media or the bankers cajole them into. Yes Dubai World could be seen as a public sector company of the Government of Dubai, but this merely makes it a stakeholder, and while generally governments do prop up such companies in times of stress, this propping up is not necessarily done through guarantees, but more through restructuring and financial support as a stakeholder rather than as guarantor. Indeed banks are seeking more the goodwill of the government, but rather than asking them to help out it is being implied that they must do so.

What Dubai Government is saying is really that the distinction has to be first made of the capacity in which this help is sought. In doing so it is distancing the call of the media for some sort of government led financial support in the form of a pay up, with actually saying that the government as a stakeholder is helping in the restructuring of the companies in question. This has to be, in my opinion, a first and important step to move forward with the solution of the problems for the long term. Only after these steps are exhausted then Dubai must make an independent judgment on how to deal with the systemic risk that an non-resolution of the problem effects Dubai's other companies and the economy.

Indeed while at one end of the spectrum some may argue that the credibility of Dubai has been hurt to the point where bankers may not be so forthcoming to new commitments, the fact remains it glosses over the inadequacies of the bankers own assessment of risks during the hey days. While Dubai cannot simply argue 'why did you lend so much to one company' it still does bring home the truth that bankers assumed that lending to some entities in Dubai as akin to lending to the government. Dubai government has not told the bankers you are on your own now, but have asked them, without being too clear, that Dubai World will restructure itself and to do this it will engage with all parties concerned to come up with a plan. I believe the statement of disclosure of the debt, and the problem segment of the debt, was a huge first step in the right direction. It is this that we have to focus upon rather than the sensational elements of this story.

It is sad, that unlike the US where there are 30 year treasury bonds issued by the government, there are no long term debt instruments available in the market to match long term funding needs with the demands of a long term development program. Eventually I believe that once the restructuring is considered and banks and bondholders have assessed the merits of the situation, Dubai should consider a longer term bond program. However, how they handle the Dubai World issues will be instrumental in the way forward for this strategy to work.

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