13 December 2009
Jim Willie CB,  “the Golden Jackass”

* Ripples from Initial Default
* Hidden Factors at Work
* Best Estimates of Bank Losses
* Confusing Secretive Corporate Structure
* Foreign Investors & the Bond Market


Special Report #1
Issue #69

DUBAI SHOCK WAVES ROCK THE WORLD

RIPPLES FROM INITIAL DEFAULT

◄$$$ THE DUBAI STORY FINALLY HIT. ITS COMPLEXITY WILL BE KNOWN A YEAR FROM NOW. LOSSES STRUCK LONDON AND EUROPEAN BANKS, ENOUGH TO CAUSE WHAT SEEMED LIKE A USDOLLAR RALLY. WIDER IMPACT IS OBVIOUS ACROSS THE PERSIAN GULF BONDS, WHERE INCOME REMAINS STRONG. RIPPLE EFFECTS ARE GOING TO SHATTER EUROPEAN GOVT BONDS, AS THE BREAKDOWN PROCESS RESUMES. $$$

Start with the immediate effects. The Powerz could not push down gold in the recent expiration. So with the US$ DX futures contract expiration a week ago, they managed to benefit from a combination of powerful expected losses to London and European banks, together with a false front of US jobs strength. The USDollar rallied hard. Its rally was based upon British Pound weakness and Euro currency weakness much more than any flight to safety. The US$ is mortally wounded still. Impact spread to other Persian Gulf nations, whose bonds sold off in varying degrees. Some extreme wealth and huge income remains in other emirate nations, without burden of heavy populations or deep social programs like in Saudi Arabia. The most crucial ripple effects will center upon the weak European nations, including Greece and Ireland. Their government debts will be downgraded steadily, a process already begun, culminating in at least some debt defaults. A Greek default and Spanish default are utterly certain and assured. The defaults will occur in the next two years, maybe sooner.

In an August public article entitled "US Bank Enemies at the Gates" (CLICK HERE) and in the September Hat Trick Letter reports, the forecasted threat of Persian Gulf bank and property loan defaults was outlined thoroughly. It was a correct forecast. Ripples and impacts, along with extreme damage and devastation, lie directly ahead in the coming several months. The US and London impact craters were formed a year ago. Now the Persian Gulf impact craters are forming. Next is the European impact craters, followed by Japanese impact craters. To uncertain degrees will come the final chapters of damage to the parts of the world where industry and commodity wealth are strong and sturdy. Refer to Australia, Canada, and China. No region of the globe will be spared, but degrees of damage will vary.

My impressions were many. The story it did not take me by surprise, as it came expected by the year end or in January. The $80 billion figure of losses is way low, set for public stories, to be raised later. Loss estimates will double in the next several months. The Abu Dhabi family quietly wishes to gut the old guard from the rival Dubai family, and later gobble up as much as possible of the Dubai properties for 20 cents on the dollar. A huge sheik rivalry is playing out. Much inner workings will never make the public news wires. The ripples will likely take down a London bank or two. Even though Royal Bank of Scotland is almost 100% owned by the British Govt, it is likely to go down hard or to create a difficult Black Hole. Both RBS and HSBC are the major losers in the Dubai World bust. People will likely take their attention off the metals exchange gold shortages during these weeks after the Thanksgiving holiday. The Dubai story is important for the weakening of London banks to be sure, but also for delaying the London metals exchange collapse. A return to extreme duress should come after the gold selloff produces some physical gold bullion upon liquidation from the price decline. The Dubai effect will weaken the London banks during the rear guard assault of the physical gold supply, to occur eventually. Events are only delayed.

In conclusion on impressions, a reprieve was given indirectly to the USDollar. Action was NOT a rush into the USDollar as much as a fearful exit from the British Pound and Euro currencies, whose banks were exposed to Dubai losses. The rise in the Euro above 160 on Wednesday November 25th makes one wonder if the Dubai story was triggered for release with a primary motive to push down the Euro and aid the oversold USDollar. My belief is YES! My personal desire is for the Euro not to take flight over 160 and head during a crisis toward 200, as stated before. My desire for gold is to see all currencies to be debased uniformly and simultaneously, and for gold to rise against all of them in powerful fashion. A sudden rush by the Euro past 160 would sidetrack a strong gold rally on the European continent. So the firm broad foundation for gold is preserved in a Euro decline.

Jim Rickards from Omnis adeptly summarized the Dubai situation. He has been cited in the Hat Trick Letter a few times recently on US$ and Gold matters. He said Abu Dhabi bankers were naively expected to prevent the bust by the Western financial markets and resident analysts. London banks would not be saved by Abu Dhabi when their sheiks could permit Dubai losses to occur, then raid the properties at heavy discount. They did not rescue, but instead want the whole enchalada for 20 cents on the dollar in his words. More importantly, Rickards stresses importance of the events, which Wall Street has minimized to date. Rickards believes the Dubai bust should be regarded as important as the Russian Govt default in 1998, whose aftermath will produce a domino effect on Western banks, in particular some failures of London banks. He seems correct, as the ripple effects have struck with debt downgrades of Greece, Spain, and Portugal already. The process has begun. My forecast is for the government debt default threat and actual event of default will force other major decisions. The strong Central European nations will split off Spain, Italy, Portugal, and Greece from shared usage of the Euro currency. The end of the European Monetary Union is soon to take place. A new Euro will emerge. More on that in the Gold & Currency Report. Germany is desperately trying to carve off Euro dead weight and the chronic drag to its vitality.

HIDDEN FACTORS AT WORK

◄$$$ HIDDEN FACTORS ARE THE ROYAL FAMILY SQUABBLES, THE RUIN OF IRANIAN ASSETS, AND INTERRUPTION OF SECRETIVE TRADE ARRANGEMENTS BETWEEN DUBAI AND IRAN. $$$

Here is a note from a man closely connected to European and Persian Gulf bankers. He exposes some inner workings regarding a key Dubai World executive. He said, "One needs to look at the family ties in the region. The reckless Dubai player is the son-in-law of the Abu Dhabi ruler. The relationship is not a friendly one any longer. The initial bailout was not $10 billion but $70 billion. The Head of Treasury in Dubai quit on September 14th in disgust and for professional reasons. His advice was not taken and the ruler had other ideas. The man is, as of October 1st, a managing director and head of treasury in a group closedly observed. We witness the Gulf States as an iceberg coming to the surface that still lies 100 miles below the surface. This is just the beginning." Note the default occurred right after the treasury head departed.

Apparently in the last couple decades, Iran has purchased 30% of Dubai's property. Their original investment in the tens of billion$ is currently in financial distress. The Dubai real estate prices have already fallen 50% since January. Clearly, Iran is set to suffer significant losses, none of which is in the news. The fall from grace of Dubai holds a different purpose. Dubai has served Iran by providing a conduit by which Iran could bypass sanctions imposed by the United States. Trade between the two countries is also controversial. Dubai operates as a major re-exporter of Iranian goods in the bypass. The use of Dubai trade is a major source of confidence that Tehran has overcome and can survive US-led sanctions. Iran has also been receiving high tech equipment for its missile and nuclear programs through Dubai. Most of Iran's gasoline imports come from storage facilities in Dubai, according to the Washington Institute for Near East Policy. So the Iranian angle casts a different light on Dubai. The central question pertains to fallout, whether the Dubai default will cause fatal damage to London and Europe. If their banks, including some sovereign debt goes into default, can the United States survive the shock? Will the USGovt pirates in the US-Gold Seas be hoisted on their own petards, and mortally wounded in the process? London banks will certainly have fewer assets to defend their ultimate weakness, namely their corruptly defended gold market, since their first motive will be survival.

From a savvy subscriber in Northern California came an assessment of the Dubai situation. Craig McC said, "While there are very close family lines between Abu Dhabi and Dubai, why should AD bail out Dubai's creditors at 100 cents on the dollar? Before oil was found, these sheikdoms were often referred to as 'Pirate States' because they principally existed to smuggle gold, pearls, and other valuables into India. Why would they bail out reckless UK and HK banks and the derivative counter parties? Emirate countries such as Dubai do not have the financial & accounting infrastructure for extend and pretend on loans like in the US.  Financial matters must be marked-to-market. The end game becomes clearer. The collapse of Dubai real estate appears to have much more geopolitical impact than just a financial crisis impacting the banking sector. On top of Iran's losses in Dubai, the Wall Street Journal recently disclosed that the US had put a hold on $2 billion of Iranian cash held in Gulf banks." Some geopolitical analysts believe that Iran might soon make an important turn and align with the Western nations, as internal social stresses combine with financial stresses to produce great change.

◄$$$ ABU DHABI WILL NOT RACE TO HELP DUBAI, AS RIVALRY REACHES THE BOILING POINT. THE TRUE STRUCTURE OF THE UNITED ARAB EMIRATES IS UNDER STUDY. $$$

The rivalry between the major city states within the United Arab Emirates escapes the Western press. The construction marvel of Dubai has gone bust, well known a year ago, but the sinking financial condition has taken this long to surface. The banking and oil center of Abu Dhabi is clearly the wealthiest of the city states. Many assumed it to take care of the costs, to write checks and pay off the debts gone bad, but they are reluctant. Abu Dhabi will not race to rescue Dubai. The rivalry extends to family backgrounds, marriages, and shared managers. Sheik Mohammed of Dubai is under growing pressure to explain the emirate's debt problems, after Abu Dhabi indicated that it will not write a blank check to bail out its neighbor. According to officials, Abu Dhabi will be cautious on all matters of assistance to Dubai World.

A senior Abu Dhabi official said, "We will look at Dubai's commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts. Until things become clearer, it is very difficult to make any further decision. Many things have to be clarified by Dubai." The desire is a restructure of the Dubai World debt, as several potential models are under consideration. The concept of a bad bank is being evaluated, much like the structure imposed on the Northern Rock bank in England, whereby the toxic assets were carved off. Investors have long assumed that Dubai could rely upon the financial support of the richer state of Abu Dhabi, which has already provided $15 billion in direct support for Dubai through the UAE central bank and two private Abu Dhabi banks. Reality was heard from Neelie Kroes, the European Union competition commissioner. He warned that rising state debt is a 'Time Bomb' that could bring down governments, banks, and creditors. Fantasy was heard from the UK Prime Minister Gordon Brown. He clung to a misguided notion, as he insisted that the world's financial system was now strong enough to withstand the shock. See the UK Telegraph article (CLICK HERE).

BEST ESTIMATES OF BANK LOSSES

◄$$$ U.B.S. ESTIMATES DUBAI LOSSES OVER $80 BILLION, AND CITES OFF BALANCE SHEET DEBTS NOT OFTEN INCLUDED IN OTHER ASSESSMENTS. THE ENTIRE DUBAI AREA IS AT A STANDSTILL ON CONSTRUCTION PROJECTS AND DEBT REPAYMENT. SOME PROJECTS ARE MINI GHOST TOWNS. $$$

Union Bank of Switzerland is the first to mention off balance sheet obligations of possible significance. They report the Dubai debt might be much higher than $80 to $90 billion. The state-run firms of Dubai seek to defer debt payments. They might owe a larger sum in liabilities assumed by investors. Saud Masud is a UBS real estate analyst in Dubai. He said, "Perhaps Dubai's debt includes sizeable off-balance sheet liabilities that imply a total debt burden well above the $80 billion to $90 billion markets have estimated so far. This could imply that the debt issued by Dubai in recent weeks is insufficient to meet upcoming redemptions. Masud expects Dubai World to seek renegotiatoin of all its liabilities during a vast reorganization of its business." On November 25th, Dubai World asked creditors to agree to a 'Standstill' agreement as it negotiates an extension on payments for $59 billion in liabilities. Extreme shock is anticipated to their investors. In focus is one particular debt to roll over. Colleague to Masud is UBS analyst Reinhard Cluse in London. He pointed to the Dubai World property unit Nakheel PJSC, which has $3.52 billion of Islamic bonds due December 14th. In total, Dubai World has $26 billion in debt it must restructure with bankers, including the Nakheel debt. He said, "The Nakheel sukuk is the largest that has ever been issued. Markets will take some time to digest this blow." Bear in mind that the Arab world dislikes mortgage debt as part of the Moslem religion, owns no US or UK or EU mortgage debt, and is adjusting to the failure of asset backed debt in its own region.

The Dubai properties are being eyed by Persian Gulf investment funds, who show growing interest in acquiring properties owned by Dubai World and other Dubai entities, including Nakheel. The entire Dubai community accumulated $80 billion of debt by expanding heavily in banking, property, and transportation before credit crisis struck last year. The second biggest of seven sheikdoms, Dubai stands as a wounded member of the United Arab Emirates. Dubai formed a fund to help reorganize state firms and sold $10 billion in bonds to the UAE national central bank in February. It borrowed an additional $5 billion on November 25th from Abu Dhabi banks controlled their government, half the $10 billion in bonds that Dubai ruler Sheik Mohammed Bin Rashid Al-Maktoum committed to raise by yearend. Nakheel bondholders could demand a 'significant sweetener' to renegotiate the debt. They want to claim equity stakes in the best among the property portfolio, according to Masud. Generally the Dubai entities, including Nakheel, will be compelled to sell assets to reduce debt in order to survive.

Masud sees vast transformation and continuation with a new face. Potential buyers will surely seek stable cash flow from properties with long leases. A very important factor is the sentiment by Abu Dhabi leaders, their rich rivals from the largest UAE sheikdom. Clearly, the richer rival emirate will not be in a position to support Dubai further financially until the smaller emirate addresses internal problems at state-run companies, changes priorities, scales down grandiosity of plans, and acts more responsibly. Dubai seeks debt repayment concessions, and must make structural reforms itself. This is a time to make great changes. Abu Dhabi and Dubai have decided to reinforce long-term confidence in the market by forcing weaker parts of state businesses to fold and step down, as they accept responsibility for bad decisions with additional defaults at some Dubai firms, Masud believes. He somberly concluded, "We can sense it. We are hoping to have some transactions from several funds with buying requirements, some over $100 million. The city is still buzzing. Dubai will not turn into a ghost town, but there will be some big restructuring and reorganization, without a doubt. This could be the realization that you cannot simply buy your way out of this crisis."

Several mortgage defaults interfere with construction progress. Numerous projects have stalled, with uncertain financial status. Some are entirely empty, as residents have often fled. Many projects will likely go bust and face new decisions toward completion by new owners, not yet formed. Dubai property developers may be liable for an estimated $11 billion required to build 40 thousand homes already started, said Masud in an interview yesterday. That amount represents the off-balance sheet cost in the funding gap, necessary to complete projects, for which investors are now defaulting, with payments due by the end of 2010. Nakheel's share of that funding gap is about $2 billion, estimated Masud. He expects half of the investors in the 40 thousand unfinished homes to default by the end of next year. The shocker is the rise in mortgage defaults. The current overall rate is now 3% across the UAE, which he anticipates could rise fivefold to the teens. See the Bloomberg article (CLICK HERE).

◄$$$ ROYAL BANK OF SCOTLAND HAS THE GREATEST EXPOSURE IN DUBAI AMONG BANKS. THE BANK H.S.B.C. HAS THE GREATEST OVERALL EXPOSURE TO THE UNITED ARAB EMIRATES. $$$

Simply stated, RBS led among the Dubai World lenders, but HSBC has the most at stake in the entire UAE, the collection of emirates. Royal Bank of Scotland underwrote $2.3 billion, or 17% of Dubai World loans since January 2007, according to a report using Dealogic data. On an absolute basis, HSBC has the largest exposure in the United Arab Emirates with $17 billion of loans in 2008, according to data from the Emirates Banks Assn. The Abu Dhabi Commercial Bank PJSC is owed $1.9 billion by Dubai World, making it the largest creditor between the rival emirates. The credit markets must brace for several weeks if not months of shock waves resulting from failed debt in Dubai World, the construction firm on steroids. Dubai World is controlled by the emirate ruler Sheik Mohammed Bin Rashid Al-Maktoum, who borrowed from more than 70 lending institutions in order to buy assets ranging from stakes for MGM Mirage in Las Vegas to Standard Chartered in London, all through Istithmar PJSC. Clearly, the Dubai World executives over-extended themselves and sent the conglomerate headlong over the cliff to ruin. The RBS name has been associated both as a lender and a broker for loans (a book runner). David Williams is a banking analyst at Fox-Pitt Kelton in London. He said, "People are concerned it is going to produce a new wave of losses. Dubai is driving everything in the market at the moment." See the Bloomberg article (CLICK HERE).

Other sources reveal that the total Dubai World debt pushes above the $100 billion amount. However, here comes the strange part. Just like with Wall Street firms and their debt insurance, the Dubai debt insurance is over-committed. The total of Credit Default Swaps for Dubai World debt is rumored to total around $600 billion. Total losses to the banking sector will be staggering huge. The citizens of the UK, via their misguided government, are now the proud owner of much grand property follies in Dubai. Their ownership comes courtesy of their ownership of Royal Bank of Scotland. The credit loss to counter-party entities is certain to cause great additional duress to the Western banking industry. Tremendous ripple effects will be felt in the Western banking world, beginning with London, certain to be felt for several weeks or several months.

Given the nature of the UAE, its leadership, the division of city state emirates, and the closed record keeping within sheikdoms, the estimation of debt exposure is and will remain an inexact science. JPMorgan, RBS, Credit Suisse, and several other large firms with financial research arms have released their best estimates as to which banks are most exposed to Dubai debt. Credit Suisse reports that European banks may have up to $40 billion in Dubai exposure. According to the Wall Street Journal, RBS derived its estimate from data compiled by the Bank for Intl Settlements (BIS). UK banks have the greatest exposure at $49.5 billion, while the EuroZone banks from France have $11.3 billion and those from Germany have $10.2 billion. RBS estimates European bank exposure almost $84 billion in the UAE. In doing so, RBS complains that obtaining correct data on Dubai is impossible. See the Daily Finance article (CLICK HERE).

A separate research report was issued by Credit Suisse, which also used BIS data. They listed the major creditors to the UAE by nation. Many circulated estimates had cited zero Asian bank exposure, but this report shows Japan holding $9.0 billion of UAE debt. Listed are the aggregate debt totals by nation to the United Arab Emirates. See the Zero Hedge article (CLICK HERE).

  • UK: $50.3 billion
  • France: $11.3 billion
  • Germany: $10.6 billion
  • US: $10.6 billion
  • Japan: $9.0 billion
  • Switzerland: $4.6 billion
  • Netherlands: $4.5 billion

CONFUSING SECRETIVE CORPORATE STRUCTURE

◄$$$ THE DUBAI FINANCIAL STRUCTURES RESEMBLE SPAGHETTI, WITH NESTS OF OWNERSHIP THROUGH THE ROYALS, AMIDST SECRECY SINCE PRIVATE, BUT WITH GOVERNMENT INVOLVEMENT THROUGHOUT. $$$

The visionary for the Dubai future has been Sheik Mohammed bin Rashid Al Maktoum. He had goals to transform Dubai into a global hub for finance and tourism, the next London or Hong Kong. To help carry out this ambitious vision, the ruler relied heavily on the Dubai World conglomerate, a maze of state owned companies that include Nakheel and Istithmar World. These are the icon developers and investors. The Dubai World encompasses the infamous subsidiary Dubai Ports World, which operates 49 ports across the world. Dubai has almost no oil production to realize its lofty ambitions. It had to borrow. Lenders thus threw over $100 billion into Dubai, at least $34 billion of which went to Dubai World. Now, Dubai World is at the center of the mess in the emirate, much of which went to marvels and follies alike as projects. The entire 'Too Big to Fail' concept is to be tested in the Persian Gulf. Royal family rivalry, team loyalty, and ambitions will all play out, hardly like in New York or London, where the federal wing is overarching and powerful. The United Arab Emirates is a loose collection of city states that often squabble, criticize, and show anger.

During the restructuring phase underway, ambitions are coming down to earth. The royals through the conglomerates strive to retain control of its infrastructure assets such as the ports, the emirate crown jewels. Abu Dhabi is expected to pursue vigorously its global property and retail holdings soon to be auctioned off, with likely favoritism. In exchange, rescue funds will be provided in most places where needed. A sovereign halo actually clouds the e ntire process. The lines between Dubai World (corporate entity) and Dubai (sovereign state) make the restructuring process more unpredictable than with a typical private company, since outsiders remain unaware of ownership, control, and claims. A crafty game has been played for certain, whereby the sheiks permitted Western banks to believe Dubai World operated with financial guarantees by the UAE, the implicit sovereign guarantee, the HALO. The belief was so strong that both lenders and Dubai World executives referred to the sovereign halo around the entire enterprise. Eckart Woertz is an economist at the Gulf Research Center in Dubai. He said, "Lenders were not looking too hard into what entity was actually backing the debt. There was an implicit sovereign guarantee, which the government did not discourage."

The massive Dubai World debt would never have reached such stratospheric heights if bankers had peeked behind the curtain, but they were forbidden to do so. Most assumed the emirate, or its neighbor Abu Dhabi, would come forth with bailouts for the businesses and projects if they ran agound. When the pressures came, the assumed guarantees were not honored, and London banks are on the hook for huge losses, just when their own British bust has cost the London banks dearly. The Persian Gulf credit losses might be enough to send London banks into the ditch again. In the end, the fate of Dubai World could be determined by the royal families that have governed the region for over a century with autocracy, rather than bankers sitting across a conference table, no matter what the numbers say.

When Western analysts take a close look at the financial structure of Dubai World and the other state run business entities in the UAE, they come up with terms like a maze, a 'Bowl of Spaghetti' to describe it. Internal documents only confirm the depiction. Dealmakers that worked with creditors relied on a highly complicated, labyrinthine chart detailing Dubai World and all its related entities. One leading US corporate executive said "It is a bowl of spaghetti in terms of their corporate structure. There are so many different companies and companies within companies." The only point lacking confusion was the total Dubai Govt ownership of Dubai World, as in 100%. Lenders were often frustrated in obtaining financial information, needed to justify terms of loans and collateral adequacy. Dubai World typically refused to disclose its complete portfolio or provide financials to any of its creditors. They were privately owned, even though government owned. They were actually neither private nor government owned, but owned by a sheiks who made the rules and were the embodiment of the law. The avenue for looting by sheiks is obvious. Former director of risk & asset management at Istithmar World, Chris Turner said "The banks understood that regular fully audited reports from Dubai World were simply not available and not to be asked for. Being a risk officer there was like nailing jelly to a wall." He estimates that Western banks lent Dubai World at least $15 billion in 2006 and 2007 without looking at the numbers, the equivalent of US Liar Loans without proof of income. Now London banks are big losers from Persian Gulf Liar Loans. To make demands was taboo and bad form. So the Arab bubble grew within the crown jewel properties long lost from control, within a spaghetti bowl of corporate mazes.

London banks are badly exposed. Royal Bank of Scotland and HSBC arranged $4.4 billion of the loans to Dubai World, according to a report by Bank of America Merrill Lynch. They did so despite solid diligence rendered by credit rating agencies. Moodys Investors Service refers to the "limited availability of information regarding the consolidated finances and debt burdens of [UAE] state owned enterprises." The Dubai World deals climaxed at the height of the credit boom, paying insane premium prices in the process, even defining the real estate peak. It paid $665 million for two New York hotels, the WUnion Square and the Mandarin Oriental, whose sale prices each broke local records. It also has a 50% stake in CityCenter, a resort & casino on the Las Vegas Strip soon to open. Due to low debt, it should be one of the easiest assets for Dubai World to sell. At $8.5 billion, it is the largest privately financed construction project ever in the United States.

The outcome of this mess will be certain major holes to London bank balance sheets, but also a rearrangement of UAE politics among the rival sheiks. Abu Dhabi will closely monitor the entire process. The primal emirate has agreed to provide as much as $15 billion in financial support to Dubai, and could easily offer additional funds to its profligate reckless neighbor. Strings are attached to aid this time, large strings that pull h ard. Some analysts think the capital of the United Arab Emirates may ask for equity in some prized assets, selectively choosing among those that fit within its own regional dreams. That could include parts of the infrastructure assets, including the ports. By not coming forth quickly with support, Abu Dhabi can more easily make claim to these prized assets. Abu Dhabi will stand by Dubai, but not with a blank check. It will do so on its own tough terms, and with lines drawn in the sand. See the Bloomberg article (CLICK HERE).

◄$$$ NEXT SHOE TO DROP IN DUBAI IS THE FIRM CALLED DUBAI HOLDINGS, WHICH IS DEEPLY INTERTWINED WITH ROYAL MONEY. DUBAI WORLD IS ONLY THE BEGINNING IN A SERIES OF DOMINOS ARRANGED. THE FALLOUT WILL TAKE DOWN OTHER LESSER FIRMS. $$$

Fears are growing among western banks that Dubai Holding will be the next state owned Dubai company to default. It is the personal investment vehicle of the emirate's ruler, Sheik Mohammed bin Rashid al-Maktoum. The conglomerate lost control in the past decade, borrowing $12 billion (£7.3 billion) to fund ambitious projects in Dubai and to create a private equity arm with Western investments (such as London wax museum Tussauds and budget hotel chain Travelodge). The primary lenders to Dubai Holding are not made public, but bankers in Dubai cite credit deals from Royal Bank of Scotland and HSBC, as well as Persian Gulf lenders. One source close to the firm's operations conceded the firm was 'a bloody mess' and its boss, Mohammed Gergawi, a close confidant of Maktoum, had been in denial about the problems it must contend with. Gergawi insisted the company had recently begun restructuring and deleveraging in a sensible fashion, the company having split into four divisions. Thousands of staff have been laid off.

The Dubai Holding functions as a very large holding company with very few checks and balances concerning its operations. It seems like a private slush fund adorned by marquee properties. One informed subscriber mentions that "While being in debt is a criminal offense in Dubai, one suspects Sheik Mohammed will not apply UAE law to his own inner circle." A growing sense of distrust has hit Dubai like a dark cloud .Senior Dubai officials have lost some credibility because three weeks ago Sheik Mohammed flatly assured investors that Dubai would pay its debts on time. In mid-November, Dubai Holdings denied the firm faced any problems repaying its debts. The bond market called them liars, pushing their debt down to 55 cents on the dollar, reflecting a lack of confidence that it will meet its obligations. The Dubai World and Dubai Holding duo are estimated to hold 60% to 70% of the total Dubai debt. The research arm from Bank of America indicates that Dubai Holding has $1.8 billion due for repayment next year. See the London Times Online article (CLICK HERE).

◄$$$ CERTAIN DUBAI PROJECTS LIKE THE PALM ISLAND ARE SINKING INTO THE SEA, A STARK CONTRAST TO THE SINKING FINANCIAL STATUS. $$$

Palm Island was originally dredged from the Gulf's seabed in Dubai. It is sinking by an average of 5 millimeters per year. That is not a great rate of subsidence, on par actually with the rate at which the Shanghai Airport is sinking in China (a landfill project). The silly talk of rising ocean levels has some concerned about the Dubai projects. According to an executive at leading European ground survey company Fugro NPA Ltd, the entire Palm Island is at risk of flood in the future if ocean levels do indeed rise. One comment from a subscriber came, that "Dubai is underwater financially and appears to be headed underwater physically.  Instead of an adult Disneyland, maybe its future is the next Atlantis." See the Business Maktoob article (CLICK HERE).

FOREIGN INVESTORS & THE BOND MARKET

◄$$$ PIMCO IS GOBBLING UP SOME PERSIAN GULF SOVEREIGN DEBT, ALWAYS READY TO BUY QUALITY ASSETS AT HEAVY DISCOUNT. THE FUNDS SHOULD PERMIT ABU DHABI TO COVER MUCH DUBAI DEBT INDIRECTLY. $$$

The Pacific Investment Management Co (PIMCO) is the world's biggest bond fund. It has descended upon the Persian Gulf looking to buy the sovereign debt of Abu Dhabi and Qatar as well Ras Laffan Liquefied Natural Gas Co, according to Michael Gomez, the co-manager of the emerging markets for the fund. During the recent credit shock emanating from Dubai, the entire Persian Gulf region suffered reduced valuations for its bonded debt. PIMCO added to its sovereign debt holdings, as bonds for the state controlled companies fell to record lows. Gomez promised that PIMCO would continue their accumulation in any selloff, since the bonds are perceived as cheap. Abu Dhabi and Qatar are attracting investors including PIMCO and ING Groep NV from the Netherlands. Investors are being reassured that those states oil and gas revenues from the two locations will maintain debt service obligations. Abu Dhabi and Qatar sovereign debt is considered very solid, given their vast energy wealth and revenue streams. The Ras Laffan bonds are associated with RasGas, a venture between state-run gas producer Qatar Petroleum and Exxon Mobil Corp. Abu Dhabi has one of the largest sovereign wealth funds in the world, worth $627 billion according to the Sovereign Wealth Fund Institute in California.

As the sovereign debt fluctuates in value in the newest trouble spot, the Credit Default Swap contracts serve as an excellent gauge on stability. They work like early warning systems, just like with Bear Stearns bonds and Lehman Brother bonds. When the CDSwap insurance jumps suddenly, despite the lack of coincident evidence, one should conclude that the harmful events are soon to come, like in days or weeks. Credit Default swaps on Dubai Govt debt jumped 54 basis points on December 9th to a seven-day high of 599, according to CMA Datavision. That means 5.99% cost to debt insurance. That price implies a 34% probability of a Dubai default, up from 29% two days earlier. The swaps traded as high as 647 basis points November 27th, CMA prices show. Note the peak occurred on the day the news struck the airwaves, a holiday during thin US markets. The richer UAE neighbor has much more reliable debt. The CDSwaps on Abu Dhabi climbed to 175.6 basis points on November 27th and rose to 177.3 on December 9th, taken from CMA. The Qatar Govt debt is more reliable still, whose CDS insurance cost was 119.38 basis points on the same recent date, versus 120.33 on November 27th. The Saudi Govt debt is seen as less risky, with CDS cost at 98 basis points. A basis point is 0.01 percentage point and is equivalent to $1000 per year for a contract protecting $10 million of debt.

Enter the credit ratings agencies. Abu Dhabi debt earns the third highest A grade from both Moodys Investors Service and Standard & Poors. The Dubai's debt per se earns no ratings by the agencies. This past week, Moodys downgraded the debt for the six Dubai Govt controlled companies it covers, including Emaar Properties PJSC, the largest UAE developer. Moodys downgraded to junk DP World Ltd, the largest Middle East import operator. Gomez intimated that PIMCO regards the Qatar Govt debt to be of sterling value, but suffered from its geographic proximity to the Dubai troublespot. PIMCO bought more Qatar debt since it traded down solely from nearby Dubai concerns. Qatar sits atop some of the most plentiful natural gas reserves in the world, the third largest. In November, their govt  sold $7 billion of bonds, the largest sale of debt ever by an emerging market government. See the Bloomberg article (CLICK HERE).

◄$$$ CONTRAST THE OPPORTUNISTS IN THE WEST WHO COME TO THE PERSIAN GULF LOOKING TO GRAB BONDS AND PROPERTY AT HEAVY DISCOUNT, EVEN AT UNREASONABLY LOW PRICES FROM THE WASHOUT. ON THE OPPOSITE SIDE IS GROWING RESENTMENT WITHIN CORNERS OF GULF NATIONS THAT THEY HAVE WASTED THEIR SAVINGS ON US$-BASED BONDS. AN EVENTUAL PERSIAN GULF BOYCOTT IS MY PREDICTION. $$$

Roy Maurer is managing director of QNB Capital in Qatar. He identified panic flight from the region that has led to an indiscriminate selloff of bonds in the region. Certain states contain vast energy wealth and very low levels of debt. He said "Those who were spooked by Dubai are giving a nice profit to anybody who knows the region and understands that Qatar, Abu Dhabi, Saudi Arabia, and Kuwait are much stronger credits. Funds are building up positions significantly." While Dubai must struggle to reinvent itself without benefit of oil wealth, other sections of the Gulf are loaded with income sources but with minimal population. Abu Dhabi possesses 8% of global oil reserves, and Kuwait also owns 8% of global oil reserves. Their populations are relatively small, with Abu Dhabi tiny at 900k people and Kuwait at 3 million. Whether Dubai wreckage is an aftershock of the Western financial crisis or not, the impact is lethal for new reasons. It has set off the next round of London and continental European impacts, directed at financial centers already weakened by toxic US debt and homegrown mortgage liquidations. Next come the final 'coup de grace' beheadings of London banks and selective European sovereign debt. The process continues after 14 months since craters were formed by Lehman, Fannie Mae, and AIG in the United States.

Contrast some rumblings within the Persian Gulf, sure to grow louder and stronger. Nahed Taher is CEO of Gulf One Investment Bank in Bahrain. Resentment is in the open, for wasted savings on bad American paper. They are awakening to the congame of galactic proportions. She said, "Capitalism has failed, and the dollar has failed. Our sovereign wealth funds must stop investing in bonds in America. We need the money here and we should not waste it on the US or Europe." Her speech was not before a handful of reporters, but rather at the annual FIKR 8 Arab Thought conference in Kuwait. Many regard it an Arab Davos Economic Summit. The ripples will continue to be felt, with grand damage heaped across London and Europe. The process has begun. The Persian Gulf nations, led by Abu Dhabi, will court new alliances like with Russia and China, given that the Dubai shock waves have hit. These new ties will develop the crucible for the next currency, a hard asset currency, one that will be integrated with new crude oil payment rules. The Petro-Dollar was announced as planned for death in September. The recent regional woes will further motivate new Gulf Coop Council advancements and accords, and push forward the timetable.

The debt downgrades handed to Greece, Portugal, and Spain in the last week are just the beginning of a wave that seems triggered by Dubai. The end of the trail will see a skein of government debt defaults. The most likely candidates for Dubai contagion are those countries that lost control of debt fueled property booms, in particular those that drew upon foreign funds. Analysts point to the vulnerable Baltic states, Bulgaria, Hungary, and Ukraine. Often these nations used cheap Swiss funds before massive (like 50%) devaluations struck in their own local currency. The big names sure to cause the most headlines and ripples of their own will be the PIGS nations (Portugal, Italy, Greece, Spain) plus Ireland. Notice no word has come from the I nation in the PIGS label, namely Italy. All in time. See the UK Telegraph article (CLICK HERE).