Dubai Inc. Loses More Luster

Perhaps they thought no one would notice. On the eve of the first day of the Hajj- when millions of Muslims were busy preparing to embark on the annual holy pilgrimage to Saudi Arabia’s Mecca- the Masters of the Muslim Financial Universe 1,ooo miles East in Dubai dropped a bomb.

The billions of dollars of debt the ambitious Emirate has racked up over the    past decade transforming itself into a glitzy commercial capital is frozen. From this morning’s Wall Street Journal:

The government said late Wednesday that its Financial Support Fund, a fund set up to manage Dubai’s debt earlier this year, would start to assess and evaluate the extend of the restructuring required. As part of that assessment, it said officials intend to ask lenders for a debt “standstill” and request they extend maturities until at least May 30. Via Dubai World Seeks Debt Standstill – WSJ.com.

This news comes nine months after Dubai’s debt problem forced them to go hat-in-hand to its richer, more understated neighbor Abu Dhabi for a $10 billion loan. But even that hefty handout was evidently not enough to support Dubai’s outstanding debts- which include payments to international banks and contractors.

The announcement comes just hours after Dubai said separately that it raised $5 billion from two local banks, the second installment of what officials say will be a $20-billion borrowing program. The bond program was unveiled in February, with the federal government of the United Arab Emirates snapping up the entire first tranche, effectively a bailout.

Why would Abu Dhabi keep bailing out Dubai? The consensus among economists and Gulf-watchers is that it’s to save face. Abu Dhabi shares Dubai’s vision of becoming a major destination (a more tasteful destination, they would likely argue) and a Dubai implosion would spell disaster for all the region’s hubs that are trying to modernize their economies and reposition for a post-oil era. This includes not just the seven emirates of the UAE but also Qatar, Oman, Jeddah and Riyadh.

Dubai has a massive damage-control campaign ahead of it. And millions of people- from the South Asian laborers, Western real estate speculators and major investors in international banks- depend on its success.