Political strings attached to Abu Dhabi aid (Full article)

For more than two weeks there was little word from Abu Dhabi, even as fears over Dubai’s debt travails wiped billions of dollars off regional stock markets and bankers warned about the contagion effect.

Yet many investors had bet on the United Arab Emirates’ oil-rich capital being Dubai’s lender of last resort. Abu Dhabi’s silence exacerbated the uncertainty as the clock ticked down on the deadline for Nakheel, Dubai’s troubled real estate developer, to repay its $3.52bn Islamic bond.

It also placed the relationship between the UAE’s most important and competitive city states under the spotlight.

Monday’s news that Abu Dhabi is lending $10bn (€6.8bn, £6.2bn) to help dig Dubai out of its immediate hole will help soothe nerves. But the nature of what many bankers interpret as a last-minute agreement will do little to assuage concerns.

In the end, many observers believe Abu Dhabi felt it had little choice but to act as it witnessed the dramatic fall-out from the decision by Dubai World, Nakheel’s parent, to ask for its debt repayments to be delayed.

Now the question on many minds is: what price will Dubai pay for Abu Dhabi’s support? At the very least, experts believe that Abu Dhabi will have oversight on how the $10bn is spent – and the funding is conditional on Dubai World succeeding in negotiating a standstill with its creditors. Some predict wider consequences.

“We believe Abu Dhabi has and will attach political conditions to its financial rescue, including possibly seeking strategic equity stakes in Dubai assets and reining in Dubai’s independence in foreign policy,” says John Sfakianakis, chief economist at BSF-Crédit Agricole Group.

When the UAE central bank subscribed to the first $10bn of a $20bn bond programme issued by Dubai earlier this year, it was seen as thinly veiled intervention from Abu Dhabi. Two Abu Dhabi-controlled banks last month subscribed to a further $5bn. But the capital was apparently kept in the dark about Dubai World’s request for a credit standstill on November 25.

Talks between the two governments and central bank officials began in “earnest” two weeks ago, observers say.

“Lot of loose ends were tied up in the last 48 hours, but the basis of what we have been talking about – the structure and the pieces and the elements – we have been working on for the past two weeks,” says a source close to the Dubai government.

Another source, however, says a senior official with Dubai World was still preparing creditors for the worst on Sunday.

Abu Dhabi has always insisted that it would not allow another member of the UAE to fail. But officials have also made clear there would be no blank cheque and Dubai would have to rein in the excesses that fuelled its problems.

The source close to the Dubai government says: “What I can tell you will happen in the future is: future decisions will be closely co-ordinated with the two governments.”

Additional reporting by Robin Wigglesworth