Dubai’s debt woes eased a great deal today when oil-rich Abu Dhabi rode to the rescue with a $10 billion bailout. That should make working out a deal with Dubai World’s creditors substantially easier.
Of course, Dubai isn’t totally out of the woods. Dubai World still must work out a restructuring deal with its creditors. And the status of other government related entities in Dubai remains fraught with uncertainty.
Perhaps more importantly, there’s a good deal of uncertainty about the political status of Dubai itself. The terms of the deal between Dubai and Abu Dhabi have not been disclosed.
“This is a government-to-government fund, the terms of that fund are internal to the government of Abu Dhabi and Dubai,” a Dubai spokesman said in a conference call discussing the deal today.
In short: we have no idea what concessions Dubai made to Abu Dhabi. The two most powerful members of the United Arab Emirates have long struggled over a variety of issues, most importantly Dubai’s close relationship with Iran. It’s at least reasonable to speculate that Dubai may have agreed to give up some of its sovereignty to Abu Dhabi.
Unfortunately, there’s probably no way for an outsider to figure out how much sovereignty Dubai has given up. Formally, of course, it remains a sovereign state within the UAE. But beneath the surface, it may not really be running its own show. The only way to tell will be to watch whether Dubai’s relationship with Iran begins to shift.
Why assume the Abu Dhabi demanded concessions? Because its support for Dubai is becoming very costly. Abu Dhabi has now committed the equivalent of almost 60% of this year’s oil income to bail out Dubai. That level of support probably doesn’t come cheap.
Credit and stock markets seem reassured that this bailout has put an end to any possible global contagion from Dubai. But the opacity of the bailout may create worries for some investors. Telling creditors that the terms on which their borrower is getting bailed out are simply none of their business seems unlikely to inspire future confidence.