To: Sultan Ahmed bin Bin Sulayem of Dubai:
Dear your magnificent munificence:
Several banks that are owed more than $10 billion by Dubai World and Nakheel will be visiting your desert kingdom this week would like to set repayment terms for the money due them. Your decision to unilaterally create a “standstill” agreement on payments has roiled the world markets and ruined your kingdom’s credibility in the financial world. These same creditors are anxious to hear your plans for another $22 billion in outstanding debt. We understand you neighbor Abu Dhabi has provided you with $10 billion in capital which will be repaid by four-year bonds, but it is not clear how this capital will be used.
It is our plan to send former US Treasury Secretary Hank Paulson and current Fed chief Ben Bernanke to Dubai before the end of the year to set up a TARP program for Dubai. This will allow you creditors to provide your kingdom more money in exchange for an ownership position in key assets that your country holds. You and your fellow princes will have to accept $500,000 caps on your annual compensation until the money is repaid.
Sincerely,
Sign here if Dubai owe your bank money_________________
A group of creditors representing about 80 financial institutions which are owed money by the Dubai sovereign fund and its real estate arm will head to Dubai this week to find our how the kingdom intends to pay them back for debt that is about to go into default. Bloomberg reports that this group may go away empty-handed. The news service says that “The meeting is unlikely to be substantive and will focus on information sharing.” In other words, Dubai will stonewall them
The major banks which are owed the billions of dollars can decide to go along with a program under which they will be paid nothing for the time being and hope to be paid later. Alternatively, they can tell a sovereign government that it will have to put up assets to cover its obligations until they are paid. This matter could end up in international court for year. Dubai’s financial reputation would be permanently and severely damaged and the kingdom would find itself economically isolated.
The banks have a chance, even it is just a bluff for now, to tell Dubai that they will not allow it to have terms to extend its obligations. Abu Dhabi can step in with more capital to cover the bank obligations. The banks, however, might actually get Dubai to offer some of the foreign real estate it owns again its loans. Most of this real estate in underwater compared to the mortgages on the properties, but some collateral is better than none.
The banks will probably blink in their negotiations in Dubai this week, but the would be a mistake. The kingdom may be sovereign, but it cannot afford to become a financial pariah.
Douglas A. McIntyre
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