Dubai's Knight in Shining Armor

Abu Dhabi yesterday announced a $10 billion loan to Dubai to help the emirate with its substantial debt obligations. The loan would come in the form of bond holdings. Dubai plans to issue $20 billion in 5 year notes with the first installment of $10 billion completely accounted for by the UAE central bank.

So ends weeks of speculation about whether or not Abu Dhabi would again come to Dubai's rescue. Last week, Zawya Dow Jones posted an article speculating that Abu Dhabi would not, in fact, bail Dubai out short of some major concessions in the form of shares in Dubai's most profitable businesses. Worry over a bailout grew so pronounced that the spread on Dubai's credit default swaps were second only to Iceland globally.

The terms of the deal, at least as announced yesterday, seem pretty benign. The bonds will be unsecured with a fixed rate, yielding a 4 percent return annually. No quid pro quo was listed in the announcement. Still, the ease of the deal makes me wonder if there is something in the fine print we're missing. Certainly Abu Dhabi was willing to prolong the speculation to some extent, perhaps to test the waters to see if Dubai could come up with international refinancing. When it was clear that it couldn't (the best it could do was to recently refinance one loan for $3.8 billion), perhaps the capital was spurned into action. But the relationship between Abu Dhabi and Dubai has never been easy and the fact that Abu Dhabi let Dubai off with nary a wrap on the wrist seems unusual.

But no means is the problem over, however. It's far from unclear that Dubai will be able to recover in any measurable way in the short term as its local real estate market continues to spiral downwards. The combination of the mass out-migration of its labor pool as well as structural changes in the state-owned companies (for example, Dubai Holdings' decision to stream line its back offices) will only create an even greater stock of available housing. As the Wall Street Journal article linked above also suggests, the stock of half-finished and abandoned projects also continues to grow. At the end of the day, it's unclear whether Dubai can settle its debts with the $10 billion loaned from Abu Dhabi and if it's not enough, will more be forthcoming?