Dubai’s request for debt ‘standstill’ stirs fear, questions

The fallout came swiftly and was felt globally after a statement that Dubai’s main development engine, Dubai World, would ask creditors for a “standstill’’ on paying back its $60 billion debt until at least May. The company’s real estate arm, Nakheel - whose projects include a palm-shaped island in the Gulf - shoulders the bulk of money due to banks, investment houses, and outside development contractors.

In total, the state-backed networks nicknamed Dubai Inc. are $80 billion in the red and the emirate needed a bailout earlier this year from its oil-rich neighbor Abu Dhabi, the capital of the United Arab Emirates.

Markets took the news badly - with the Dubai woes and the continued fall of the US dollar giving investors twin worries. Dubai’s move raised concerns about debt across the Gulf Region. Prices to insure debt from Abu Dhabi, Qatar, Saudi Arabia, and Bahrain all rose by double-digit percentages yesterday, according to CMA DataVision.

“Dubai’s standstill announcement . . . was vague and it remains difficult to discern whether the call for a standstill will be voluntary,’’ said a statement from the Eurasia Group, a Washington-based research group that assesses political and financial risk for foreign investors interested in Dubai.

“If it is not, Dubai World will be going into default and that will have more serious negative repercussions for Dubai’s sovereign debt, Dubai World, and market confidence in the UAE in general,’’ the statement added.

Dubai became the Gulf’s biggest credit crunch victim a year ago. But its ruler, Sheik Mohammed bin Rashid Al-Maktoum, had continually dismissed concerns over the city-state’s liquidity and claims it overreached during the good times.

When asked about the debt, he confidently assured reporters in a rare meeting two months ago that “we are all right’’ and “we are not worried,’’ leaving details of a recovery plan - if such a plan exists - to everyone’s guess.

Then, earlier this month, he told Dubai’s critics to “shut up.’’

“He needs to produce a recovery plan that will be respected by those who want to do business with Dubai,’’ said Simon Henderson, a Gulf and energy specialist at the Washington Institute for Near East Policy.

After months of denial that the economic downturn even touched the glitzy city-state, the Dubai government earlier this year showed signs of trying to deal with the financial fallout that has halted dozens of projects and touched off an exodus of expatriate workers.

In February, it raised $10 billion in a bond sale to the United Arab Emirates central bank, which is based in Abu Dhabi.

The deal - seen by many as Abu Dhabi’s bailout of Dubai - was part of a $20 billion bond program to help Dubai meet its debt obligations.

On Wednesday, the Dubai Finance Department said the emirate raised another $5 billion by selling bonds - all taken by two banks controlled by Abu Dhabi.

Abu Dhabi’s ruling Al Nahyan family has been more conservative with its spending, investing oil profits into infrastructure, culture, and state institutions. During Dubai’s real estate bonanza, the Nahyans saw their neighbor race ahead with development plans and tourism plans that had plenty of hype but few details on how they would be pulled off.

Some did materialize. The Burj Dubai is scheduled to open in January as the world’s tallest building. But many other projects are still just blueprints.

The standstill will probably not immediately affect CityCenter, an $8.5 billion casino complex opening next month in Las Vegas that is half-owned by Dubai World. A Dubai World subsidiary and casino operator MGM Mirage agreed with banks in April to fully fund and finish the 67-acre development.