Dubai Gets Its Restructuring, Bad News For Soveign Debt

One of the worst pieces of news that holders of sovereign debt can receive is that a large nation has been able to restructure its obligations on terms which are favorable to the country, but not the debtholders. Dubai was able to do just that.

Dubai said that 99% of the creditors in Dubai World agreed to new payment terms. Dubai World obligations are not those of the nation itself but they are a proxy for the financial health of the Middle East country. It is  Dubai’s state-owned operating arm.

The hole that the firm and its parent nation have dug is very deep. “Dubai and its state-owned companies have racked up $109.3 billion of debt, according to International Monetary Fund estimates” Bloomberg writes. “Dubai World and its main creditor banks agreed in May to restructure $14.4 billion of bank loans and $8.9 billion of government liabilities to resolve a crisis that roiled global markets last year. The company said banks would be paid $4.4 billion in five years and another $10 billion over eight years at below-market interest rates supported by assets sales.”

The banks have essentially taken cents on the dollar to help save Dubai World from insolvency. The talk about “moral hazard” and sovereign debt, which has hung over Greece, will likely begin again.

Greece, and other financially weak euro zone nations, will almost certainly look to Dubai as an example of how to negotiate with creditor banks and nations.  Earlier this year, Greece was bailed out by its fellow members of the Euro Zone along with the IMF. The bailout helped calm the nerves of investors in other troubled debt issued by countries like Spain. Many European countries have passed austerity budgets to reduce deficits and raise taxes. It is too early to say whether those actions will also hurt economic growth and bring back the problems of national debt and deficits which cannot be held down.

Many global capital markets investors still believe that there is a default in Greece’s future. That will bring the holders of the nation’s paper to bargain and to settle for what they can. And, the Greek government will be able to study the “playbook” created by the government of Dubai.

Douglas A. McIntyre