Dubai finally goes bankrupt – but the interesting part here isn’t about the country going on a building spree and not being able to pay for it – that part was clear a long time ago – but the test Islamic financing is going through.
Dubai financed part of its debt binge through Sukuk bonds – a short version is that a special entity is created which ‘owns’ the asset, and ‘rent’ is paid to the bond holders in that Sukuk.
Whats the difference between regular financing and this Islamic financing? Nothing really, except for one interesting aspect – the bond holders can be paid a ‘lesser’ rent if the asset isn’t performing. With regular bonds, the interest has to be paid, rain or shine, or you’re in defualt.
Of course, this being the real world, the Dubai Sukuk bonds don’t seem to function any differently from regular ones. The whole thing is a farce trying to fool investors.
The interesting part is how Dubai deals with the Islamic bonds v.s the non Islamic regular interest bearing bonds in default.
Practically everything everyone has ever said about Islamic banking has been hot air – so you have to look at how people are structuring, selling, buying and dealing with defaults on this new new thing called Islamic banking.
So far, there hasn’t been any differences, so Dubai’s default brings the final test on the line – default.
Ironically, one of the first claimed laws of Islamic financing is to avoid speculation – and what is Dubai if not a gigantic speculation play?
Still, compared to the sand dunes Dubai started of with, they are in a win win situation.
The smart thing for them to would be to give international debt holders a huge haircut – offering as little as 30-50 cents on the dollar – which is fair, consdering the underlying asset values have fallen by 50-60% anyways.
Where does the money come from? From the Sheikh of Dubai, who has multiple billions stashed away, and the rest from Abu Dhabi.
It might take forever for Dubai to deliver on its promise of the city of the future – but damn they tried hard – and while the investors can’t wait for their returns so long, the locals can.