Former Clinton White House economic adviser Nouriel Roubini says that the message for investors emerging from the Dubai debacle is clear: don’t “assume implicit government support” for the entire world’s failed banks and firms.
“Credit ratings for Dubai-owned companies now reflect this lesson, based on a fundamental credit outlook, not an implicit government backstop,” writes Roubini, a professor at the New York University, and consultant, in his column in Forbes magazine.
“Dubai World's request for a standstill follows months of reassurances to creditors by the emirate and the issuance of over $15 billion in sovereign debt. The debt standstill suggests Dubai had run out of options.”
Last week, the state-owned Dubai World asked for a six month stay for creditor payments. Roubini says this calls into question the emirate of Dubai's ability — and willingness — to service its debts.
“While the debt in question, including a $3.5 billion bond issued by a property development subsidiary, was not sovereign-guaranteed, investors had treated it as such, assuming that the size of Dubai World and the profile of the underlying projects would imply a government rescue,” writes Roubini.
“Uncertainty was heightened by illiquidity and poor price action from the Eid (Islamic religious) festival period. The lack of information and communication at the time of the request added to concerns about the complete scale of Dubai's implicit and explicit obligations — with on and off balance sheet debts as high as $200 billion by some estimates, or over 400 percent of gross domestic product.”
Roubini believes that an outright default of Dubai World's debt unlikely, but creditors will feel a significant share of the pain because of these problems.
Other experts agree.
The Wall Street Journal is reporting that the debt of Emirates Airline, which has $50 billion worth of planes on order, isn’t guaranteed by Dubai’s government.
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