Shock at Dubai World announcement

The business world was expecting Nakheel to redeem its Islamic bond when it matures in two weeks.

Recent comments from Dubai government VIPs reinforced the expectation that debts would be paid on time.

So there's alarm in markets around the world since Dubai World briefly announced that it was asking creditors to defer payment for at least six months.

What a disastrous blow for Brand Dubai.

The bond has enormous significance because it's both the world's largest Islamic financial instrument and is considered the ultimate litmus test for Dubai's ability to meet its commitments.

Equally bad, the announcement was made after close of business on the eve of the Eid holiday, so now no-one's available for comment or clarification. That fact hasn't been missed by commentators either.

Badly, badly handled all round.

Commentators around the world are talking about it in disapproving terms and there's the question of whether this will be considered a default, with enormous implications for not only Dubai but Islamic bonds in general.

The New York Times says that the move demostrates that Abu Dhabi won't unconditionally bail out Dubai government controlled companies but that there has to be a genuine restructuring of the debt with the pain being equally shared by Dubai and its banks.

The Wall Street Journal talks about bankers and executives being stunned by the announcement, and says 'Dubai's efforts to deal with its mountain of debt estimated to exceed $80 billion were dealt a hammer blow.'

The Times, once one of the world's great newspapers but now reduced to near-tabloid level since being bought by Rupert Murdoch, predictably goes with the cliche 'Dubai World and properties built on sand.'

The UK Daily Telegraph headlines its report 'Dubai recovery hopes hit by debt 'standstill' call' and says that 'the credit-crunched Gulf playground, has shattered hopes of imminent financial recovery.'

The Financial Times has the widest coverage and talks about markets reeling at the announcement and acting with alarm at fears of default. Comments from analysts confirm the reaction.

There's only one positive side to the announcement and predictably the local media puts that spin on it, that Dubai World is to be re-restructured and an outside world-renowned expert is being brought in as Chief Restructuring Officer. Gulf News print edition headline, for example, says 'Dubai World gets a breather'.

The trouble is that it's the right move but it's taken far too long for the move to be made.

For nearly a year the Dubai World companies have been going through a 'restructuring'. But it's always a nonsense for the management responsible for a company's troubles to be allowed to create and preside over a restructuring made necessary because of their own policies. A Chief Restructuring Officer, an outside expert with a proven track record, was needed from the beginning of the crisis to sort the mess out. But it wasn't treated with the urgency the situation demanded.

They became bloated companies with unnecessarily huge numbers of people being paid huge amounts of money, huge duplication of job functions between the companies in the group, unnecessary competition to build the biggest, tallest.

That led to too many mega-projects all going ahead at the same time. Worse, many were pushing engineering into uncharted waters but second and third versions were being pushed ahead before the engineers had worked out how to make the first one. The Palm Islands/The World are a classic example.

Heads, senior heads that is, should have rolled long ago.

Thankfully the financial crisis put a stop to the nonsense and has forced the companies to come down to earth. Restructuring was inevitable and long overdue. It is happening but it's all taken far too long.

We're a year into the crisis before the real moves are made that needed to be made there and then.

(The Tamweel/Amlak merger is another example. The property market is desperate for mortgage providers but the two largest have been in limbo for over a year without a policy decision being made to get them back into business. And we've been told that it won't happen until next year.)

To my mind this is the biggest blow to Brand Dubai that I can recall. The one that will do the most damage to Dubai's reputation as a good, safe place to do business, as a place that understands what business is all about and knows how to conduct it.

We'll undoubtedly be seeing more of the 'Dubai collapsing, reclaimed by the desert' stories from certain commentators as a result of this announcement.

Ignore them, Dubai will survive as the commercial centre that it's been for nearly two hundred years.

But this is a huge setback.



You can read some of the comments about it here:

NYT. Dubai Fund Asks for Stay on Debt Payments.

WSJ. Dubai Debt Woes Turn Ugly After It Seeks Standstill Deal

The Times. Dubai World and properties built on sand.

Daily Telegraph. Dubai recovery hopes hit by debt 'standstill' call.

FT. Dubai shock after debt standstill call which also has links to related articles.