Dubai Tries To Calm Investors, But Concerns Remain

Most financial markets have shrugged off Dubai World's announcement last week that it needed help repaying its debts. Since the announcement, the conglomerate has moved to restructure some $26 billion of its debt. Outwardly, Dubai is defiant and upbeat, but privately some people are very worried.

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MICHELE NORRIS, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

MELISSA BLOCK, host:

And I'm Melissa Block.

It's been nearly a week since the conglomerate Dubai World asked for help repaying its staggering debts and sent world financial markets reeling. Well, most of those markets have since shrugged off the bad news from Dubai. Thats thanks in part to Dubai World moving quickly to restructure a large chunk of its debt, some $26 billion. But the Persian Gulf itself is less comforted and markets there continue to drop today.

NORRIS: NPR's Peter Kenyon is in Dubai and he joins us now. Peter, we've been hearing a lot about how other people see Dubai's debt problems, but what are people saying there?

PETER KENYON: Well, officially, Dubai is upbeat even defiant. The Emirate's ruler, Sheikh Mohammed bin Rashid al Maktoum, said Dubai's economy is strong, solid. International markets misunderstood the debt issue, he says. And this is a patriotic week here, I might add. Tomorrow is the 38th anniversary of the creation of the United Arab Emirates. It reminds you how young this place is, politically speaking, and also that there's a bit of an identity crisis and a certain amount of tension.

The much wealthier neighbor, Abu Dhabi, for instance, with all the oil, has resented to some extent laboring in the shadow of the glitzier Dubai during the boom years. But privately, here, now in this crisis and virtually all criticism here is private some people are very worried. There was no hint that this debt problem was coming. I'm told that even some key advisers to the Dubai government knew nothing about it, just a few hours before the announcement was made last week. And in a place where fortunes are made and lost on volatile things like investor confidence, this is kind of an unnerving shock.

NORRIS: We're gradually learning more about Dubai World, the group behind some of Dubai's most staggeringly expensive projects. What are the banks and the bondholders who are carrying Dubai World's debt now learning?

KENYON: Well, first of all, $26 billion and potentially missed payments turns out to be the good news. The original figure was closer to 60 billion. But according to Dubai World's latest statement, some of the companies are in quite good financial health, like DP World, the global port operator, and they're not part of these talks.

That's why Dubai leaders say people overreacted, the problem isn't as big as you thought. But there are some other things Dubai World's creditors are learning that are not coming as such relief, including the question no one seems to have asked when these massive debt finance projects were launched: What happens if the government-owned Dubai World really does fail to pay off its debt?

NORRIS: Peter, help us understand something. In other countries, when a company misses a payment, it's called a default and there can be serious problems behind that. Could that happen here?

KENYON: Well, analysts and economists I talked to say there's a number of reasons why that's unlikely. First, these aren't regular bonds. They're Islamic bonds called sukuk, and they use a complicated mechanism that - you'll be very glad to hear I'm not about to go into - in order to avoid paying interest, which is forbidden under Islam. But no one really knows what it means to default on a sukuk. Is it the same as defaulting on a bond? As far as I can tell, it's never been tested.

And secondly, although the government has made it clear that Dubai World's debts are corporate, not sovereign, Dubai World is connected to the government. The government owns it. And as such, it's not clear they can even be sued or that any judgment could be enforced. Analysts are saying that puts a lot more pressure on creditors to come to the table and try to negotiate some kind of restructuring no matter how painful that might be.

NORRIS: Now, we should mention that the United Arab Emirates remains extremely wealthy and Dubai World has a number of solid profitable companies. But what's likely to change? Is it likely to emerge from this crisis looking quite different from the way it looked going in?

KENYON: That does seem likely. Certainly for some of the real estate arms of Dubai World, like Nakheel, which was responsible for some of those Palm Islands and the big developments, their debt is coming due very soon, some of it, in less than two weeks.

But this restructuring will take quite a bit longer than that and eventually Dubai World may look quite different. Some people are hoping it emerges with a little more transparency and clarity about the rules it operates under. They say that could help restore international confidence in investing here.

NORRIS: Thank you, Peter.

KENYON: You're welcome, Michele.

NORRIS: That was NPR's Peter Kenyon speaking to us from Dubai.

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