By Tim Falconer A DOW JONES NEWSWIRES COLUMN It rained cats and dogs in Dubai last weekend. Judging by the stock market's Monday showing, some of those dead cats bounced.
Reaction to the city state's latest handout from its neighboring sheikhdom has been swift and mostly positive. The DFM General Index, Dubai's main equity benchmark, powered more than 10% higher, taking gains for the past three sessions past 20%. The cost of insuring sovereign debt tumbled, meanwhile five-year credit default swap spreads tightened by around 160 basis points.
The trigger for this optimism came from oil-rich Abu Dhabi, dipping into its deep pockets and forking out $10 billion for Dubai to pay part of the debt of government-owned conglomerate Dubai World Dubai World and its struggling property unit Nakheel Nakheel .
Dubai had, of course, rocked world markets in late November when it requested a freeze on $26 billion of debt payments by Dubai World Dubai World in order to restructure the company.
And, while the sighs of investor relief could be heard all along Sheikh Zayed Road here (payment of Nakheel Nakheel 's $3.52 billion bond was due today), a closer look at the accompanying Dubai government statement offered some more sobering realities.
Dubai, it seems, is pursuing a new bankruptcy framework in case Dubai World Dubai World can't reach agreement with creditors to restructure $26 billion of its debts.
And, as a lawyer friend pointed out to this writer, issuing an insolvency law that Dubai World Dubai World could take advantage of isn't necessarily a sign of positive things to come.
It could appear to some, he argued, that Dubai is now prepared to play hardball with its creditors.
In his words: "It could be 20 cents on the dollar from here boys or insolvency."
The statement also referred to Dubai's commitment as a global financial leader to "market principle" which even this writer knows doesn't necessarily mean paying back debt.
It could signal stricter compliance to the letter of the law, and, by this, not paying a cent more than it has to.
Investors' memories are still fresh, and wounds a little sore, from the initial Dubai World Dubai World debt standstill request.
So don't be surprised to see a cold dose of reality hit the local exchanges in the coming few days.
After all, the emirate's flaky economic fundamentals haven't changed.
There's still a mountain of debt for Dubai to address. Analysts at UBS reckon there's an additional $32 billion in loans and bond repayments still outstanding over the next 24 months.
And, with this, the equity risk premium on Dubai's equity market isn't likely to disappear anytime soon.
So, while the stock market dines out on the fact that an immediate debt default has been avoided, it would be folly for investors to take their eyes off of what is looming on the horizon.
(Tim Falconer has been a financial news reporter since 1999. He has reported on equity, money and commodity markets for Dow Jones Newswires in Wellington, London and Dubai. He can be reached at +971 04 364 4968 or by email: tim.falconer@dowjones.com)
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(END) Dow Jones Newswires
14-12-09 1326GMT
