After tentatively implying that there would be a back-stop to Dubai World´s debt problems, the Dubai Government on Monday disowned any legal obligation to Dubai World and told creditors that they needed to take responsibility for their loans.

“Creditors need to take part of the responsibility for their decision to lend to the companies,” said Abdulrahman al-Saleh, director general of Dubai’s department of finance. “They think Dubai World is part of the goverment, which is not correct.”

(Reuters)

My Comment:

What´s going on here? The back and forth isn´t recent, but has been going on the whole year, with Dubai implying at one time that its debt load was taken care of, and at another, that it still had more problems; and in this instance, first seeming to back up Dubai World and then, backing-off from its backup….

The timing and vacillation seem to suggest that the government is testing the market and the reaction of investors before making its move. Not good.

And it leaves open the possibility, already raised by UBS in a recent Bloomberg piece, that the problems exceed the $80 billions of government liabilities and might extend to off-book structures that are not presently known.

Update:

After weekend assurances from Dubai that its much richer fellow-emirate Abu Dhabi, seat of the UAE federal government, would help, and that liquidity would be assured for local and international banks that needed it (through a “special additional liquidity facility”), Asian markets recovered this morning from their sell-off last week. But this morning, the local stock exchanges have been hit hard and this new announcement could provoke a second sell-off in world markets, especially in the UK FTSE, since British banks, especially Royal Bank of Scotland, have loan exposure to Dubai World.

Then, there´s also the exposure that UK banks have to other investments where Dubai World holds a stake.

And there´s the indirect exposure US banks have to Dubai through ties with UK banks.