Bye Bye Dubai World!

Oh, how ambitious Dubai was. Its economic model? Debt financing through the concept of OPM(Others People's Money}. It was a wonderful concept those days, touted by most financiers.

Th country that could do no wrong by building anything, some of which even defy climatic constraints,finally buckled.

The fateful day was Nov 27. This is the report from the Straits Times of Singapore.

The Dubai Emirate government would not bail out its flagship, Dubai World of its US$59 billion debt. It was too massive for comfort. So, the Dubai Government asked for a six months' reprieve for its flagship holding company.It's called a 'standstill' for all repayments.

The payment standstill raised the spectre of the biggest sovereign default since Argentina in 2001.Global credit rating agency Standard & Poor's, which rules on a company's or government's ability to repay debts, said the announcement “may be considered a default”.

For the banks that financed the borrowing binge that fuelled Dubai's ascent — total debt is estimated at US$80 billion.

The reality check that landed on Wednesday was that Abu Dhabi, the oil-rich governing emirate of the United Arab Emirates, will not unconditionally bail out its reckless neighbour.

Instead, a genuine restructuring of Dubai's debt, with pain being shared equally between Dubai and its bankers, needs to take place.

The announcement shocked the markets and Dubai's bankers.

“It's shocking because for the past few months the news coming out has given investors comfort that Dubai would most probably be able to meet its debt obligations, and most analysts were of the view that Nakheel's commitments would be met,” said asset manager at SICO Investment Bank.

The bonds of Dubai World's property developer, Nakheel, dropped sharply and the cost of insuring against a Dubai government default soared.

To some extent the announcement of the standstill request was mitigated by earlier news on Wednesday that Dubai had raised US$5 billion from Abu Dhabi banks. Still, that figure was considerably less than the US$20 billion Dubai had been hoping to attract from investors in the region as well as abroad.

“What is interesting is the timing,” said Chris Davidson, an expert on the region at Britain's Durham University. “This indicates that the money from Abu Dhabi is not to be spent on Nakheel and Dubai World.”

The decision to take such a step comes just weeks before Nakheel, the developer of Dubai's famed palm-shaped islands, was due to make payment on its US$3.52 billion of Islamic bonds.

The conglomerate, which also owns Dubai's huge port operations and has taken stakes in glamorous overseas properties like Barneys and MGM Mirage in Las Vegas, has billions of dollars of payments due in the months that follow.

In 2006, its unit Dubai Ports World was locked in a Herculean tussle with Singapore's PSA International for British port operator P&O, which Dubai eventually clinched.

Earlier this year, Dubai raised US$10 billion in a bond issue that was taken up by the Abu Dhabi central bank.

It is clear now that these sums have not been enough — especially as many of the assets in Dubai World's diffuse portfolio have plunged in value over the last year.

Dubai World bosses have ruled out a firesale of any assets and say they are sure of a recovery in real estate prices, which have dropped by as much as 40per cent.

Dubai's economy was hit hard as the global credit crunch over the past year ended a six-year boom in the region and sent the emirate's once-flourishing property sector into decline.

The government said it had appointed a special support fund to manage the restructuring effort and that Deloitte had been hired as an adviser. “As a first step,” the statement said, “Dubai World intends to ask all providers of financing to Dubai World and Nakheel to 'standstill' and extend maturities until at least May 30, 2010.”

Dubai World is run by Sultan Ahmed Sulayem, a close adviser to Dubai's ruler, Sheik Mohammed Rashid al-Maktoum, who has insisted publicly that Dubai and Abu Dhabi will work together to reach a solution on the debt question.

But while Abu Dhabi may sit upon 9 per cent of the world's oil and manage the largest sovereign wealth fund, it is evident now that it is not willing to just write a blank cheque to cover all of Dubai's mounting debts — at least not right now.

The world exalted the magic that was Dubai World then. Today, it wants nothing to do with it no matter how fanciful its projects were. How sad.....