ABU DHABI cheered markets yesterday by extending a $10 billion bailout to Dubai, enabling its fellow emirate to avoid an embarrassing slide into default by troubled state-owned property developer Nakheel.
And in Europe, Greek prime minister George Papandreou last night pledged “radical” action to tackle the country’s budget deficit a week after ratings agency Fitch withdrew its A rating from the country sovereign debt.
News of the Dubai bailout sent international stock markets higher yesterday, led by banks. However, there was little reaction on the Dublin market.
The move by the oil-rich capital of the United Arab Emirates ended three weeks of market turmoil following Dubai’s request to freeze payments on $26 billion in debt held by state-owned conglomerate Dubai World, Nakheel’s parent.
The Dubai government said it would use the funds to settle a $4.1 billion Nakheel sukuk – Islamic bond – due yesterday and for interest payments and working capital while Dubai World negotiated a debt restructuring.
However, analysts warned that concerns remained about the conglomerate’s restructuring and other parts of the emirate’s commercial empire.
In Greece, as officials struggle to convince investors they can get to grips with public finances, Mr Papandreou said in a speech in Athens: “In the next three months we will take those decisions which weren’t taken for decades.”
The prime minister, who came to power in October, said many choices would be “painful”, although he pledged to protect poorer and middle-income Greeks.
Greece urgently needs to restore its international credibility following a downgrade last week by Fitch to BBB plus, and a warning by Standard Poor’s of a possible downgrade.
Moody’s will visit Athens this week, raising fears that Greece will suffer another downgrade as it gears up to borrow another €50 billion on top of a record €60 billion this year.
The public debt is set to rise next year from 113 per cent to 124 per cent of GDP, the highest in the euro zone.
Europe’s economic and monetary affairs commissioner Joaquin Almunia yesterday warned Greece not to rely on the euro zone to come to its rescue.
“It does not appear that he has provided much insight into how he will reduce Greece’s heavy debt burden,” Brown Brothers analysts led by New York-based Marc Chandler wrote in a research note. “The most important take-away point is that key decisions will be made over the next three months and the pain will be distributed.”
Mr Papandreou, who said he would forge a “new national” agreement, yesterday pledged to cut the deficit, currently 12.7 per cent, below the EU’s 3 per cent limit by 2013. “Today our biggest deficit is that of credibility,” he said. “In the last years Greece lost all traces of credibility, which is why international institutions, partners want to see actions.”
In Dubai, analysts said Dubai’s reputation as a business haven also remained in question and the emirate still faced a tough task to reschedule the remaining $22 billion of Dubai World’s debts.
“Markets hate uncertainty, but they loathe unpredictability. In terms of rebuilding reputations, this process is far from over,” said Philipp Lotter of Moody’s.
Abu Dhabi’s move appeared to restore what had been perceived as an implicit state guarantee of Dubai World’s debts. Its intervention came after the Dubai debt crisis caused its own borrowing costs to rise alongside those of other Gulf states. – (Copyright The Financial Times Limited 2009)
