Abu Dhabi, the oil-rich governing emirate of the United Arab Emirates, surprised investors on Monday by pledging to provide $10 billion to Dubai, easing fears about an outright debt default by the smaller, struggling emirate. The move will allow repayment of a $4.1 billion bond issued by Nakheel, a property developer owned by Dubai World, the emirate's flagship investment company and creator of the iconic palm-shaped islands that have come to epitomize Dubai's construction boom. The bond matured Monday. Stock markets in Europe, Asia and the United States rose on the announcement. In Dubai and Abu Dhabi, stocks of beaten down banks and real estate com panies rallied sharply.
The move will allow repayment of a $4.1 billion bond issued by Nakheel, a property developer owned by Dubai World, the emirate's flagship investment company and creator of the iconic palm-shaped islands that have come to epitomize Dubai's construction boom. The bond matured Monday.
Stock markets in Europe, Asia and the United States rose on the announcement. In Dubai and Abu Dhabi, stocks of beaten down banks and real estate com panies rallied sharply.
Part of the statement today strongly suggests that the powers that be did not want to risk the deal proceeding to court with the rules that had been in place. From Reuters: Dubai has announced a bankruptcy law that it said could be used in case Dubai World and creditors failed to reach an agreement on debt maturing in the future. "Dubai will announce a comprehensive reorganization law, a framework that is based upon internationally accepted standards for transparency and creditor protection," Sheikh Ahmed said. "This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations." (Emphasis added.) The US had an analogous situation with the first major default of a company that had a lot of credit default swaps written on it, the parts maker Delphi. The CDS contracts provided that the CDS holder needed to present a bond to the protection writer and would then get 100 cents on the dollar (up of course to the amount of protection purchased). The problem was that far more CDS had been written than there were Delphi bonds, by a factor of about 8, if memory serves me right. ISDA did not want the market to fail its first major test. So a protocol was invented, contrary to the terms of the CDS contracts, to allow for cash settlement of the CDS (ie, a protection buyer did not have to present a bond to get his CDS payment). Now with the benefit of hindsight, it would have been better for the CDS market to have suffered then, who knows, we might have been spared synthetic CDOs and the AIG rescue. But the Delphi case also illustrates that those who insist on the sanctity of contracts are more than a bit naive. Contracts are modified all the time...provided the stakes are high enough. Clearly, saving millions of individuals from foreclosure doesn't rates, since none of them individually has any clout. (Emphasis added.)
Dubai has announced a bankruptcy law that it said could be used in case Dubai World and creditors failed to reach an agreement on debt maturing in the future. "Dubai will announce a comprehensive reorganization law, a framework that is based upon internationally accepted standards for transparency and creditor protection," Sheikh Ahmed said. "This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations." (Emphasis added.)
"Dubai will announce a comprehensive reorganization law, a framework that is based upon internationally accepted standards for transparency and creditor protection," Sheikh Ahmed said.
"This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations." (Emphasis added.)
The US had an analogous situation with the first major default of a company that had a lot of credit default swaps written on it, the parts maker Delphi. The CDS contracts provided that the CDS holder needed to present a bond to the protection writer and would then get 100 cents on the dollar (up of course to the amount of protection purchased). The problem was that far more CDS had been written than there were Delphi bonds, by a factor of about 8, if memory serves me right.
ISDA did not want the market to fail its first major test. So a protocol was invented, contrary to the terms of the CDS contracts, to allow for cash settlement of the CDS (ie, a protection buyer did not have to present a bond to get his CDS payment).
Now with the benefit of hindsight, it would have been better for the CDS market to have suffered then, who knows, we might have been spared synthetic CDOs and the AIG rescue. But the Delphi case also illustrates that those who insist on the sanctity of contracts are more than a bit naive. Contracts are modified all the time...provided the stakes are high enough. Clearly, saving millions of individuals from foreclosure doesn't rates, since none of them individually has any clout. (Emphasis added.)
While, in the US, when the first test of credit default swaps comes along and it is discovered that the number of CDSs written on Delphi bonds exceeded the number of bonds by eight times, the International Swaps and Derivatives Association changes the rules so even those who had no insurable interest get a payoff. Why do I suspect that it was the US taxpayer who footed the bill and not the ISDA? As I was long ago advised: "Other Peoples Money! the only way to go!" If anyone has knowledge of that particular fiasco I would appreciate a comment. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
