Lacking bailout Dubai heads into Icelandic territory

Wall Street Journal (subscription req.):

Abu Dhabi's decision last week to pump $4.4 billion into its own banks while offering no support to lenders in Dubai or other emirates in the Gulf federation may simply be brinkmanship amongst the sheikhs. But the possibility Abu Dhabi will refuse to come to Dubai's aid -- once seen as almost unthinkable -- can no longer be ruled out.

That raises the prospect of a deeper debt crisis in Dubai. And even a fragmentation of the 37 year-old federation if Abu Dhabi refuses to pump billions of dollars into the economies of poorer emirates like Dubai to prevent either a corporate default or severe downturn. The cost of insuring Dubai debt has rocketed to around 10 percentage points for five-year debt -- higher even than Iceland.
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Abu Dhabi is driving a hard bargain. Its demands are thought to include the surrender of Dubai's autonomy and the loss of control over crown jewels such as Emirates Airline and Nakheel, builder of the emirate's Palm-shaped islands. That may be too much for Dubai's ruling Maktoum family to stomach -- partly because the rulers of the two sheikhdoms are cousins. But also, because Dubai contends it was a principle of the 1971 agreement to form the federation that Abu Dhabi would use its oil wealth to support the other emirates.

Financial Times:

The cost of insuring Dubai’s sovereign debt has become almost as expensive as insuring troubled Iceland, illustrating the depth of investor concern about a default by the emirate.

The spread on Dubai’s benchmark five-year credit default swaps last week broke the 1,000 basis points barrier, similar to the spread of Icelandic bonds.
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nvestors have been spooked by Abu Dhabi’s decision this month to inject funds into its own banks, without similar support for financial institutions in other emirates. Analysts had previously hoped that the capital of the United Arab Emirates would step in to prevent a default in Dubai, the UAE’s commercial hub.

“The market’s thought process is moving from Dubai being implicitly guaranteed by Abu Dhabi to questioning the relationship between Dubai and Abu Dhabi,” said Dino Kronfol, managing director at Algebra Capital in Dubai.

Birth of a nation, 41 years ago:

Roughly half way along the highway between Abu Dhabi and Dubai, there is an interchange at a place called Semeih. ... It was here, 41 years ago tomorrow, that the two fathers of the UAE federation, Sheikh Zayed of Abu Dhabi and Sheikh Rashid of Dubai, met on February 18 1968, to lay the foundations of the state of today.

The author, Peter Hellyer, makes no mention of his disagreements with Christopher Davidson about the meeting place.

As to a bailout, Secret Dubai thinks Dubai did get one from Abu Dhabi after craftily courting Iran and Saudi Arabia for aid. It's a strategy that I and others have suggested. Abu Dhabi doesn't want its fellow emirate to be beholden to either of those.