A Miracle in the Desert: Abu Dhabi Bails Out Dubai

Just as it looked like Dubai might go into a default on some of its debts and have to complete a $26 billion restructuring with bondholders, neighbor nation Abu Dhabi has provided billions in much-needed financing. The move has spurred stock market rallies around the world.

Abu Dhabi put $10 billion into state-owned Dubai World and its real estate arm. Dubai's property development firm, Nakheel, will use about $4 billion of the capital to pay off bonds due this week. The balance will be used to help Dubai World restructure its debt.
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"The agreement is on condition of Dubai being successful in negotiating a standstill previously discussed with Dubai World creditors," the Dubai government said.

In other words, the Abu Dhabi money will be used as leverage to restructure the balance of Dubai's debt. Dubai appears to have over $35 billion in obligations that will not be helped by the infusion of capital.

The move was not expected, which raises the question of why it happened.

The financial world's view of the stability of the United Arab Emirates has suffered, and Abu Dhabi may have decided to bolster the region's image by bailing out the weakest country in the U.A.E. It may also be that Dubai will have to sacrifice some of its most valuable real estate to Abu Dhabi at below market prices, giving Abu Dhabi the chance to make major profits on its aid to a neighbor.

It's likely that they money did not come without strings attached, but it may take some time to find out what those are.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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