Dubai World: A great precedent

By Felix Salmon
November 26, 2009
Dubai World default is big news -- big enough that it's even made it into Gawker. Your one-stop shop for bloggy coverage this Thanksgiving is Alphaville, which features for instance this wonderful chart of the debt structure which is now being crawled over by lawyers around the world.

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The Dubai World default is big news — big enough that it’s even made it into Gawker. Your one-stop shop for bloggy coverage this Thanksgiving is Alphaville, which features for instance this wonderful chart of the debt structure which is now being crawled over by lawyers around the world.


Personally, I’m quite happy about this default, since it sets another very useful precedent of a state-owned company defaulting on its debt. Historically investors in state-owned companies have perceived an implicit sovereign guarantee — there’s even a German word for it, Anstaltslast. The result is a huge and unhelpful moral-hazard trade.

So it’s great that the government of Dubai has made it clear that Dubai World’s lenders aren’t going to be automatically bailed out by the sovereign, despite the fact that the government has hundreds of billions of dollars in its sovereign wealth fund*. Would that Treasury will follow suit when it comes to the creditors of state-owned companies like AIG.

*Update: As my commenters have pointed out, it’s Abu Dhabi which has hundreds of billions of dollars in its sovereign wealth fund, not Dubai. Some of those dollars might well yet be used fora Dubai bailout, but it won’t be on terms Dubai likes.


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Ah Felix, but Dubai will be bailed out by the UAE. Painful terms yes, but bailout yes.

Posted by The Real Deal | Report as abusive

:’( poor show Felix

not sure that dubai’s sov. wealth fund has hundreds of billions of dollars. abu dhabi’s sov fund has hundreds of billions, but it seems like there are limits to abu dhabi’s willingness to use those funds to help dubai.

Posted by bws2 | Report as abusive

It’s one of the few examples of a cash-for-conservatism gig, which is a game (after Dubai’s flaunting of Westernised fun when it thought it’d won at finance) the Abu Dhabians will absolutely love playing. The drunken expats and the titty bars…? Hmm, time to move to ex-USSR.

The Dubai sovereign wealth fund is only $20b. (Abu Dhabi’s is $600b+), I wouldn’t be surprised if the $20b itself is borrowed since the fund only started in 2006 and Dubai GDP is $40-$50b (hard to get reliable figures). If Dubai is asking for an extension, I assume that Abu Dhabi has declined to guarantee the full amount, which means the bankers can now foreclose if they choose?

Posted by Robert | Report as abusive

Slightly OT. Here is the question that I have about the financial crisis. I understand that no one could anticipate precisely how things would work out, but was everyone incompetent in that they failed to develop plans and strategies for dealing with problems that might develop under various scenarios? About the only one that did quickly have plans underway once they had legislative authorization was Bernanke and the Fed. Everything else seems to have been an ad hoc afterthought, reactive in the extreme. But if they had, perhaps the crisis would not have occurred in the first place, so it really took being blind to it for it to occur whether do to incompetence, indifference, greed, or sloth.

Posted by Lord | Report as abusive

Don’t be naive. Sovereign wealth fund doesn’t mean it is guaranteed by the sovereign. Bankers should wake up.

Posted by Alberto | Report as abusive

You mean, I think, Would that Treasury follow suit and let the Agencies go. Oh whoops, too late, the Fed holds much of the Agency paper now.

Posted by a | Report as abusive

The ripple effect will cascade into other sectors such as real estate and infrastructure which would suffer along with financials.

Posted by Matt | Report as abusive

This is a sorry state affair in regard to severe debt positions from Dubai.Because of easy,good labors from Middle East and from South Asian countries, good publicity on modern economic plans,implementations by schedule by Dubai authorities had created a big,positive images among many Non Residents, film personalities,traders and more cash,credit flows from westerners, middle east riches had created,shown some comfortable picture in recent years.Because of involvement by government, investors, tourists had brought some valid dividends to investors.World recession, oil prices had come down, no easy purchase ideas from westerners had created some panic to Dubai!s economy doors.I think that, her neighboring countries with rich cash,oil reserves will bail out Dubai!s financial crisis.

The economic \”swine flu\” has just hit the middle east. The greedy of the world thought the good times would last forever. They overproduced everything, but curtailed the production of oil that led to its high price and one way flow of money to oil producing countries, which is the root cause of the world economic crisis. There is no easy solution to the great depression of this century.

Posted by Mathew Thomas | Report as abusive

It might be a coincidence that Halliburton moved to Dubai and within two years the whole place plunges into economic disaster. Then again, that’s more or less the same effect they had on U.S. society. Not to mention Iraq.

Posted by The Bell | Report as abusive

I went through the entire offering circular several months ago, which included that diagram of the transaction and I wrote a short blog post at the time, which might be interesting for those who don’t want to dig through the offering circular: d/090506063401/

In Dubai, There is a practice that one would end up in jail for not paying your debt.Think about Dubai world!!!.

Posted by Skumar | Report as abusive

Aha. Just another example of “Easy to Borrow, but not so easy to pay back”. You can hire all the MBAs that you want to and Accountants to count the beans, but having to manage a business and when to know the direction to take is another matter. Those kind of decisions take a lot of thought and a lot of “NOT LISTENING TO THE MONEY LENDERS”. I do not know how many developers in the United States that I have seen go down this road, but probably not on quite this grand a scale. It will be a pretty rough road, and they might even survive.

Posted by f belz | Report as abusive

Hasn’t DW or some of its subsidiaries issued sukuk? IIUC, those are Shariah-compliant instruments not exactly ‘bonds’ in the western sense. They earn interest that isn’t exactly interest.Anyway, couldn’t this complicate the litigation that will surely result from any default?

Re “implicit sovereign guarantee”:In what way is this different from “too big to fail”?

Posted by Volker Hetzer | Report as abusive

Felix, I wish you’d think of the people in Dubai before claiming it would be good for sovereign defaults to happen more often.It might be acceptable for a default to happen in a democracy but not in an oligarchy. Remember Russia in 1996? LTCM lost billions because, unlike George Soros, they didn’t understand that an oligarchy actually BENEFITS from a default and is, therefore, more likely to default on its debt.Dubai is, for all intents and purposes, an oligarchy. No different than Russia in 1996 (and now). And just like Russia’s default, when the oligarchs didn’t want to pay back the money they’d borrowed, Dubai and Abu Dhabi might default too. When Russia did it, it threw the rest of the country into an economic crisis and a total mess while the oligarchs lined their pockets with cash.Ask the people Russia what benefit they got from the sovereign defaults and they’ll say none. Ask the Russian Oligarchs and they’ll say millions (if not billions).

To the short list of bankers who screwed everything up, we’re handing the equivalent of the combined capital of Microsoft, Apple, Google, Exxon, and possibly far more, and saying, no problem, just promise that you’ll be smarter this time around.Are we doing this because those very few bankers are saying, behind the scenes, that they know where even more financial bombs are buried, and they’ll let them explode if we don’t bail them out?

Posted by ferd | Report as abusive

I agree. Anyone with a minimum of common sense would have seen that Dubai World’s baroque business plans were doomed. But because the government was supposed to be backing it up, the speculators went for it. It is definitely a healthy precedent that will instill a bit of sanity into the emirate’ future economic planning, and will balance the surreally sugar-coated image that it built through its marketing machinery.