dubai world

Dubai World is unlikely to pay off developer Nakheel’s $980m Islamic bond, a source familiar with the matter told Reuters on Monday, and all options are open. The issue is due on May 13. “It is very unlikely that the bond will be paid off,” said the source. “Incredibly unlikely.” Dubai World is currently in talks to restructure about $22bn in debt and is due to present a proposal in March.

Are banks a safer bet than government entities in the United Arab Emirates? Three pieces of news today suggest so.

First, the cost of insuring against sovereign Dubai default has shot past its November 2009 levels – i.e. when the Dubai World/Nakheel problems were afoot. 

Sovereign debt in Dubai is seen as riskier now than it was last November, during the Nakheel crisis. The cost of insuring Dubai debt is now 6.62 per cent*, meaning it costs $662,000 to insure $10m Dubai sovereign debt against default. A month ago today, it cost $415,000. But current rates are some way off their highs a year ago, when it cost $940,000.

Markets are pricing in more risk after news emerged that creditors of Dubai World might receive just 60 per cent of their investment back. The rising cost of insurance is not due to illiquid trading: Dubai CDS volumes are high and increasing (see chart).