Abu Dhabi left with little choice

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 delay.

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.”
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Climate Finance Scheme ?

As climate treaty negotiators continued to tussle over how much rich countries should pay to help poor ones deal with climate risks, preserve forests and adopt non-polluting energy technology, the financier George Soros appeared on the sidelines Thursday to identify a new pot of $100 billion that could help pay the bills. The money, he said at a news conference, would come from a pool of assets made up of an international financial instrument called special drawing rights, or S.D.R.’s.

Placed in a “green fund,” he said, this money could be invested in the most vulnerable developing countries to protect rain forests, plant new forests, expand farming methods that store carbon, and help with adaptation and energy programs.

There are substantial hurdles to moving forward, including a requirement, given how such funds are administered, for congressional approval in the United States — no easy step these days.

But Mr. Soros said that France and England recently undertook a $2 billion deal involving S.D.R.’s that provides a template for his climate plan.As the global financial crisis played out, he explained, the International Monetary Fund issued $283 billion in S.D.R.’s, $150 billion of which went to the world’s 15 biggest industrialized countries. These instruments are a “virtual currency” with a value set by a basket of real currencies.

More than $100 billion in S.D.R.’s is sitting in reserve accounts, he said. They are backed by the monetary fund’s gold reserves, and currently the excess value of the gold is supposed to be used to benefit the world’s least developed countries, he added.

He acknowledged that the S.D.R.’s normally serve as a source of liquidity, but in this case would be used as a financing tool. But given the limits on what rich countries are able to offer in the climate talks with budgets tight and deficits high, he said financial innovation was vital to breaking the deadlock in the negotiations.

The justification, he said, came from the scope of the climate challenge. “I’ve been convinced that this is really an existential problem for the world,” he said. The idea has merit as a way to pay for the “fast start” climate adaptation fund of $10 billion a year that rich countries have proposed but not yet figured out how to pay for, said Thomas C. Heller, who advises Mr. Soros on climate policy and is a professor emeritus of international legal studies at Stanford University.

FSB, cross border supervision

According to a report from the Financial Times, thirty financial institutions, most of which are based overseas, were selected by the FSB for "cross-border supervision exercises," to check for systematic risk. The list of institutions involved five domestic banks, which included Bank of America (NYSE:BAC), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), JP Morgan Chase (NYSE:JPM) and Morgan Stanley (NYSE:MS).

Overseas financial institutions chosen by the Financial Stability Board included the Royal Bank of Canada, Barclays (NYSE:BCS), HSBC (NYSE:HBC), Royal Bank of Scotland (NYSE:RBS), Standard Chartered, Credit Suisse (NYSE:CS), UBS (NYSE:UBS), BNP Paribas, Societe Generale, BBVA, Santander (NYSE:STD), Mitsubishi UFJ (NYSE:MTU), Mizuho, Nomura, Sumitomo Mitsui, Banca Intesa, UniCredit, Deutsche Bank (NYSE:DB), ING Groep (NYSE:ING).

Meanwhile, the FSB earmarked six insurance firms including Aegon, Allianz, Aviva, Axa, Swiss Re and Zurich. The FSB was made to address the issue of systematically important cross-border financial institutions by setting up "supervisory colleges." According to the FT report, the colleges will be asked to create "living wills," documents that outline how they could be "wound up" if another crisis were to occur.