markets surge as abu dhabi bails out dubai world in surprise move
News Posted On: 14 December 2009
Global stock markets reacted positively on Monday morning as news emerged that Abu Dhabi had advanced $10 billion to Dubai to help resolve its Dubai World debt repayment problem. Just over 40% of the cash was advanced to the property developer Nakheel to cover an immediately due payment. The remainder will be available to underwrite Dubai World.
The bailout from Abu Dhabi, a major oil exporter and the largest member of the United Arab Emirates, was unexpected, driving Dubai's benchmark stock index up by more than 10 percent. Interestingly, despite having just taken on a hefty $10 bn liability, Abu Dhabi's stock market also rose, up by 7 percent in early trading.
John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole said of the move that it ".. should bring in a lot of confidence. Basically Abu Dhabi is footing the bill....”
The new perception seems to be that governments in the Middle East, as elsewhere in the world, are now prepared to bail out almost anything that doesn't move, a sure recipe for inflation.
But can bailouts go on ad infinitum? This is the question vexing investors today – for if debt is to continue to be monetised we are in for a bout of protracted and perhaps accelerating inflation including in real estate, whereas if the decision is taken to defend currencies then all asset classes are at risk.
Nakheel is living on borrowed time and money. Its next debt deadline is on Dec 28 when creditors including HSBC, Lloyds and Royal Bank of Scotland call the shots on whether to extend the company's grace period.
Meanwhile the government-controlled company Dubai World wants its own debt 'restructured' – ie pushed back in time - 'up until the end of April 2010'.
What concerns this writer is what comes after the end of April.
The old adage 'sell in May and go away' is as wrong as often as it is right. Last year selling in May was exactly the wrong thing to do and markets have rallied hard all year. However past performance is no guarantee and it is possible we would see another downturn in May 2010. Comments like this from Sheikh Ahmed bin Saaed al-Maktoum, chairman of Dubai's fiscal committee, concern this writer.
"Our best days are yet to come," he said in a media statement.
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