The Dubai mess

By Felix Salmon for Reuters, January 12, 2010

If you think that the Dubai situation has pretty much been
resolved with that cash infusion from Abu Dhabi, think again. Paul
Whitfield and Vipal Monga explain that nothing really has been cleared up
at all, and that there are far more — and far bigger — uncertainties
surrounding the emirate’s finances than most of us had suspected.

For one thing, Dubai has no real legal structure capable of
dealing with a default on this level, which has forced it to hurriedly import a
jury-rigged system with UK and Singaporean jurists, based on British and
American (not Islamic) legal structures.

But it’s not clear how trustworthy the Dubai’s government —
its ruling family — really is, given that they actively encouraged the idea
that Dubai World had a sovereign guarantee.

And it’s also far from clear what has happened to the $10
billion received from Abu Dhabi in February, or, for that matter, another $5
billion that was lent to Dubai by two Abu Dhabi banks in November. As for the
further $10 billion which arrived in December, we know that $4.1 billion of it
was used to repay Dubai World’s sukuk. But the final destination of the
remainder of the money is also opaque.

What’s more, no one has much of a handle on the total
liabilities involved, either:

Dubai World has officially released a $59.3 billion debt
figure as of the end of 2008, but that number isn’t taken at face value by
financial experts.

Deutsche Bank AG, for example, says that the figure included
more than just financial debt, including equity, and payments due to suppliers.
Discounting the nonfinancial debt led the German bank to estimate Dubai World’s
financial external debt at $24.27 billion.

Morgan Stanley has its own estimate of the liabilities,
taking a disclosed $26.2 billion number from Dubai and then adding another 30%
to that to account for a presumed undisclosed amount, putting Dubai World’s
debt at a seemingly arbitrary $34.1 billion.

The upshot is that the restructuring is going to be messy
and unpredictable: my guess is that it’ll be a highly political process which
will drag on for years. As ever, the big winners are certain to be the lawyers.