Dubai Bubble Update – Another $10 Billion goes into the hole

The Central Bank of the UAE has just bought $10 billion of the $20 billion long-term bonds Dubai issued on Sunday. The five-year bonds pay 4% per year.

"This is a clear step from the central government to back up Dubai," said Khald Masri, a partner in Rasmala Investment, a very active investment bank in the region. "The central government's step will help ease the tense situation in the local economy and markets."

Dubai has finally admitted that it needed the Central Bank money to stay afloat as credit, though it couched the statement in financial jargon.

"This issuance will provide the Dubai Government with the necessary liquidity to substitute the liquidity that has dried up globally in the last 12 months and accordingly meet all upcoming financial obligations," it said. "This program will secure the necessary funding for Dubai to meet its financial obligations and continue its development program."

The bond is an unsecured fixed rate paper, Dubai said.

"The fixed rate at 4% per year is excellent," investment banker Masri said. "Dubai got the best deal in that, taking into account the conditions in the international markets."

But he warned there was "no way" Dubai could get as good a deal from international markets as it did from the UAE when it issues the second $10 billion in bonds. That is an understatement, although I suspect Citibank will be jumping in to purchase a few of these bonds. It certainly helps to have friends in high places and Citi already dumped $8 billion of American taxpayer's money in last year.

The Dubai stock market rallied Monday, rising by 7.91%, with big bounces for stocks for semi-governmental companies, especially in the banking and real estate sectors.

Moody's Investors Service warned in October that Dubai may need help from Abu Dhabi to pay for its debt. The emirate may have to refinance $15 billion this year in maturing loans and bonds, Moody's said.

Abu Dhabi, for its part, has invested around the world, buying a 75% stake in New York's iconic Chrysler Building last summer when oil prices were at their peak and helping to bail out the financial giant Citigroup with $7.5 billion at the end of 2007.

Abu Dhabi Investment Authority (ADIA) is the world's largest sovereign wealth fund, with an estimated $875 billion in assets, according to brokerage Morgan Stanley, although these do not reflect the current valuations and Emaar was forced to allow one of it's subsidiaries in the US, John Laing homes to file for chapter 11 protection this week.

The stunning amount of property for sale in Dubai continues to grow, and there seems no end in sight at the moment.