We knew this already:
Dubai’s sovereign debt problems were pushed off the front pages by the economic troubles of Greece, Spain, and Portugal. But they shouldered their way back into the news Wednesday as Reuters reported that the kingdom will officially ask for a standstill on payments of $22 billion in debt issued by state-owned Dubai World.
And we even knew this might occur:
According to Reuters, the Arabic language daily Al Ittihad says that the restructuring process could take six months. The repayment problems are so severe that CNNMoney reports there are rumors that Dubai’s state-run private equity firm Istithmar World could sell the Queen Elizabeth II ocean liner.
This has the appearance of digging out change from the sofa to pay your bookie because you lost a bet on the Super Bowl. Selling the QEII? C’mon. Please. The folks at Istithmar World would have better luck holding up liquor stores with “Born to Lose” tattooed on their chests.
The linkage between the Dubai government and the entities it sponsors (Nakheel, Dubai World, Istithmar World, etc.) is the key. Somewhere, in the ethereal air of what is the balance sheet and income statement of a GSE, the business – driven by profit motive – has to be separated from the public service mission, which transcends profits and provides a “public good.” But for the life of me, I struggle to recognize what the public good is in investing in commercial real estate, luxury hotels and casinos around the world, and building indoor ski resorts in the desert. They all sound like crappy ostentatious investment ideas to me.
This is a similar issue to Greece because at the core of both situations is poor governance. In Greece, they don’t want to govern themselves. In Dubai, it’s poor governance because the government never spelled out what “public good” they were trying to attain. If it was economic growth of the Emirate, they could’ve done this through other means that wouldn’t involve direct investments of government money.
But back to the debt. There has been little movement in the negotiations of the standstill agreement, which if you read the December 14, 2009 announcement, opens up some issues (emphasis mine):
As a first action for the new fund, the Government of Dubai has authorized $4.1 billion to be used to pay the sukuk obligations that are due today. The remaining funds would also provide for interest expenses and company working capital through April 30, 2010 – conditioned on the company being successful in negotiating a standstill as previously announced.
I included the Statement on Dubai World 12-14-09 press release so you could read it yourself.
Does that statement sound like a bailout? That sounds like a covenant test to me: if you successfully negotiate a standstill, we pay interest and provide working capital until April 30.
I bet someone didn’t get paid something. But until then, it’s all quiet on the Dubai front.