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Dubai rushes to ease debt default fears

(Agencies)
Updated: 2009-11-27 15:50

Dubai Marina's tower blocks rise over the Shoreline Apartments on Nakheel's Palm Jumeirah in Dubai, November 26, 2009. [Agencies]

Dubai World's announcement on Wednesday also sent the cost of insuring Dubai's debt against default soaring and bond prices tumbling.

Dubai World, whose slogan is "The sun never sets on Dubai World", has $59 billion of liabilities.

Dubai's credit default swaps are being quoted as high as 500-550 basis points, some traders said, while the cost of insuring Qatari, Abu Dhabi and Bahrain debt also surged.

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Analysts downplayed the fallout for the wider region, however, pointing out that Dubai funded its growth through loans, whereas its neighbours are mostly major oil and gas exporters.

"I would not rush into talking about contagion. Anything from Abu Dhabi or Qatar is backed by serious money. Dubai is a lot more leveraged," said Youssef Affany, a relationship manager at Citi who specialises in the region.

"There will be some level of solidarity from the emirates and the big neighbour, Saudi."

Analysts expect financial support from Abu Dhabi, a neighbouring member of the United Arab Emirates and home to most of the country's oil. But Dubai might have to abandon an economic model that focused on heavy real estate investment and inflows of foreign money and labour.

Options for Dubai?

If creditors reject proposals to postpone near-term debt obligations until May 2010, the Dubai government could be forced to hold a firesale of its international real estate.

International property advisers braced for a potential slew of instructions to sell trophy assets owned by Dubai World.

"We do expect the Dubai government to step up efforts to raise capital via real estate sales, and sales of their UK assets in particular," said James Lewis, a member of the Gulf capital markets team at property consultant Knight Frank.

One fund manager said Dubai could not separate the debts of DP World from the Nakheel bond at the heart of Dubai's problems.

"Trust is the basis of all credit. It can take decades to build up credit-worthiness and moments to destroy it. They have the money to pay the Nakheel bond," said the fund manager.

"DP World can't be kept separate. If that's an asset of Dubai World, ownership of that can presumably be attached by Nakheel creditors."

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