Nakheel bondholders are having a ‘temper tantrum’

Posted by Izabella Kaminska on Dec 10 10:55.

The UAE’s English language newspaper The National put out a snippy editorial on Wednesday, lecturing about the perils of moral hazard and the like.
In short, it told Nakheel bondholders to get over themselves, summing up their reaction to Dubai’s standstill on Nakheel obligations as nothing short of a hissy fit:Dubai World’s creditors responded with a temper tantrum in the international media. To read the coverage of Dubai’s announcement, one might think Dubai and the companies it controls are ready to miss payment on their entire $85bn in estimated debts.
Stupid investors.
The National goes on:
Investors mistook being government owned with being government backed. Governments in emerging economies end up starting and controlling much of the corporate scene. Eventually, if all goes well, they privatise those companies to eliminate the conflict of interest.Until then they are major shareholders, with limited liability, like Richard Fuld was the largest shareholder at Lehman Brothers. He walked away from that wreck. Much of the coverage of Dubai’s predicament has been from the perspective of its creditors, not from that of the Government trying to figure out which businesses are worth saving and which aren’t. Little wonder: the Government has been cryptic(隱祕); investors vociferous (喧嚷的).
As for the restructuring process:
Clearly, the Dubai Financial Support Fund, which is in charge of disbursing, and making sure it is paid back, the $10bn in rescue funds Dubai borrowed from the Central Bank in February, took a hard look at Nakheel’s business prospects and decided that paying off its bonds at par might not be the smartest use of the money. Electing not to bail out Nakheel, after all, would leave more cash to help out more promising businesses. This is the way debt restructurings work. They are like divorces –messy. Debtors threaten to default. Sometimes they do. Creditors threaten to foreclose. Sometimes they do.
In all, according to The National, Dubai’s government is doing a very sound thing indeed.
Above all, it’s not encouraging the sort of bailout-associated moral hazard the West has partaken in, a process which might otherwise have led to:
… try this scenario for size: imagine that every debt for whatever project, no matter how extravagant, was guaranteed. If companies couldn’t come up with the cash, the Government would, even if it had to fork over barrels of crude oil. Try to picture the pandemonium that would cause.Anyone with any hare-brained investment scheme could borrow as much as they wanted. Secure in the knowledge that their debt was guaranteed, they could build edible skyscrapers of Swiss chocolate reinforced with candy canes, so high that on a clear day you could see Riyadh. They could cool them with icebergs towed from Greenland or just let the whole thing melt in summer into a big pile of delicious chocolate-mint rubble. It wouldn’t matter. Creditors could be certain that no matter how ridiculous the project, they would be paid.