Why Did Abu Dhabi Bail Out Dubai World?

Rallying Asian and European stocks, Abu Dhabi has bailed out its neighboring state-owned holding company Dubai World. The government will provide $10 billion to the company saving it from defaulting on a $4.1 billion bond payment. In November, the specter of a Dubai default disrupted global financial markets rising fears of where the next shock could occur. Now business writers are looking at why Abu Dhabi bailed out Dubai World and how Dubai will fare:

• To Abu Dhabi Goes the Spoils, writes Douglas A. McIntyre at 24/7 Wall Street: "Abu Dhabi controls about 85% of the UAE oil reserves, but Dubai has valuable fields including the offshore Fateh and Southwest Fateh deposits. Abu Dhabi may have gotten preferntial rights to the oil and gas from these regions. Dubai also holds valuable real estate outside its borders. Some of this may have been pledged to Ahu Dhabi in exchange for aid. Most of these properties have lost some of their value in the collapse of the global commercial real estate markets but they are likely to regain their value over the next decade. Abu Dhabi has the wealth to wait."

• Dubai World Was Too Big to Fail, writes Edward Harrison at Credit Writedowns: "The UAE was not prepared for the knock-on effects a Dubai World default would have. Fearing the worst, they have now stepped in to stem the tide." James Drummond at the Financial Times adds, "Abu Dhabi's banks are believed to be heavily exposed to Dubai's government, its state-owned companies and private sector. Worries over contagion from Dubai caused the Abu Dhabi Stock Exchange to slump 15.3 per cent between November 25 and December 9. The ADX has gained 14 per cent over the past two days thanks to the capital's support of Dubai."

• Trouble Still Brews in Dubai, writes Tiernan Ray at Barron's: "Dubai's state-run property developer, Dubai World, is not out of the woods... despite the Gulf state of Abu Dhabi agreeing to lend $10 billion to cover the company's debt woes. As Amran Abocar and Rachna Uppal point out, Dubai World still must get creditors to agree to a 'standstill' on debt repayment in its $26 billion in IOUs in order to be able to cover working capital and interest expenses."