Dubai’s $US80 billion time bomb catches traders on holiday

Debt-stricken Dubai has lit the fuse of what could be the next time bomb under world financial markets – and it has chosen to do so when both US and Middle East traders are away from their desks.

Wall Street and New York commodity exchanges are closed for Thanksgiving, with Black Friday coming up – a day when Americans go on a pre-Christmas shopping binge.

In the Middle East, Muslims have the long weekend of Eid al-Adha, a festival of sacrifice.

That has left the financial markets in Europe to absorb the full impact of Dubai’s shock announcement of “standstill” in debt repayments on its flagship company, Dubai World.

Bank shares fell up to 6% and the major market indexes all fell more than 3% in their biggest one-day dives since April.

The standstill does not apply to Dubai Ports World, which operates one of the biggest container terminals in the world. But it does include a $US4 billion Islamic bond, or sukuk, issued by property company Nakheel, which is developing the huge Palm Island reclamation project, among others.

Dubai is tightly controlled by the ruling Maktoum family and its total debts amount to about $US80 billion, about half of it owed to European banks, according to Credit Suisse.

Credit-rating agencies have wasted no time in downgrading Dubai Inc-linked companies and bonds but, as with much official information, it is unclear whether the announced “standstill” is effectively a default.

Moody’s Investors Service and Standard & Poor’s both said the debt payment delays may be a default. The restructuring "may be considered a default under our default criteria, and represents the failure of the Dubai government…to provide timely financial support to a core government-related entity," S&P said.

In this case, the borrowings are also effectively sovereign debt. No country has defaulted since Argentina in 2001.

A default depends on whether creditors are being told the payments will not be forthcoming for six months or they being asked to defer their claims.

The Nakheel bond is due on December 14 and moves to raise money from fellow emirate Abu Dhabi have already brought in $US10 billion with another $US5 billion from other United Arab Emirate banks.

These bailout funds are going to the Dubai Financial Support Fund, a committee involving Deloitte and which is now in charge of Dubai World’s business operations.

Dubai World’s assets range from stakes in Las Vegas casino company MGM Mirage to London-traded bank Standard Chartered and luxury retailer Barneys New York.

Dubai has borrowed a total of $US80 billion to fuel a four-year construction boom to transform the economy into a regional tourism and financial hub.

But the global financial crisis starting last year ended that dream with one of the world’s steepest property slumps.

Residential property prices alone have dropped 50% from their 2008 peak, according to Deutsche Bank. Many commercial sites have been abandoned.