Shares in the Gulf have soared after news that Dubai has received $10 billion from its neighbour Abu Dhabi to tide it over till April 2010.
Some $4.1bn will be used to repay a Dubai World Islamic debt which matures today.
The rest will be used to keep state-owned Dubai World operating until the end of April while it negotiates a restructuring deal with creditors.
In a statement, Sheikh Ahmed bin Saaed al-Maktoum, the chairman of the Dubai Supreme Fiscal Committee said: “We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices. Dubai is, and will continue to be, a strong and vibrant global financial center.”
He added: “Our best days are yet to come.”
Stock markets in the Gulf plummeted last month when Dubai revealed that it had asked creditors to restructure almost half its $59 billion total liabilities. The announcement sparked panic in stock markets around the world as investors expected Dubai to default, stoking fears of a financial meltdown similar to the collapse of Lehmans last year.
But the Dubai stock market rose by more than 10% on news of the bailout of the first tranche.
The bond had come to be regarded as a “bellwether” for Dubai’s debts as well as its international credibility.
Dubai said it would focus on addressing the concerns of Dubai World’s “existing trade creditors and contractors” in recognition of the “the concerns of Dubai World trade creditors within the Emirate of Dubai”.
The reference to “within the Emirate” will lead some to worry that local creditors will be given preference, and further questions are sure to be asked. Dubai World, and Nakheel in particular, is thought to owe hundreds of millions of dollars to construction firms and others involved in the building of its projects.
The size of the bail-out is the biggest surprises. The support fund, established earlier this year, has already received $10bn from the central bank, and raised $5bn from Abu Dhabi-owned banks at the same time as the “voluntary standstill” was announced.
It was originally only supposed to raise $20bn in total.
The statement will renew questions over what assurances Abu Dhabi has been given in return. There has been speculation that it will seek to take control of prize “Dubai Inc” assets such as Emirates Airlines, though a greater degree of political integration is the more likely pay-off.