Abu Dhabi Bails out Dubai World

This morning, the world economy dodged a bullet when oil-rich Abu Dhabi bailed out its fellow emirate, Dubai. Technically, the bail out is for Dubai World, a holding company owned by the Dubai government. A $10 billion loan is sufficient to take care of payments due on an Islamic bond and to keep Dubai World afloat until it can restructure itself. If it means that the world economic situation doesn't take another hit, it will be cheap at twice the price.

Dubai and Abu Dhabi are two of the seven constituent parts of the United Arab Emirates, the two that matter. Abu Dhabi has the oil and is a bit conservative socially. Dubai is slicker, with no oil of its own really, its government decided to become a financial hub for the region. That in itself was a good idea, but it got rather silly and overheated of late. Dubai is where islands are being constructed in the shape of a palm tree and in the image of the globe.

Needless to say, much of Dubai's growth was founded upon hefty leverage, and when the credit bubble burst, property values halved. The real estate operation of Dubai World, Nakheel, found itself in trouble. When one of the largest sovereign holding companies can't pay its bills, the situation is grave. And the worst of it was the region's finances are not that transparent, so once the rumors get started, the problem would only grow in magnitude.

And so, Abu Dhabi gets out its check book, like an older brother posting bail for a younger sibling. This isn't the first time that Dubai has needed help like this, but one wonders if it is the last. Dubai likes its independence (it had its own armed forces until 1996 rather than merging it into the UAE's), but the $10 billion almost certainly came with strings.

What is certain at this stage is that disaster appears to have been averted. Dubai is still in for a bad patch as it deleverages and as the world comes to realize that custom made islands are not a must-have item. But another wave of financial misery won't be part of this holiday season, at least, not coming from the direction of Dubai.

© Copyright 2009 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

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