The government of Dubai heightened investor panic just a bit more when it recently announced that it will not bail out its own chief financial investment arm, Dubai World. The government said that ‘even though struggling Dubai World is state owned, the government won’t guarantee its debts or bail it out.’

According to Abdulrahman Al Saleh, director general of Dubai’s Department of Finance, “The government is the owner of the company, but since its foundation, it was established that the company is not guaranteed by the government.” On the other hand, ‘lenders have deemed Dubai World as part of the government.’

Dubai’s finance director adds, ‘creditors need to “take part of the responsibility for their decision” and help the company, which asked for a standstill on its debts last week, to restructure.’ The government representative asserted that while ‘the company received financing based on its project schedule,’ this is ‘not a government guarantee.’

This official statement caused negative reaction from investors. Said the chief economist at Banque Saudi Fransi, “The fine print might not oblige the government to guarantee Dubai World debt, but implicitly the creditors saw the two entities as one.”

The tight spot that Dubai finds itself presently in casts a huge doubt on the emirate’s ability to sustain its reputation for being at the forefront of economic development in the Arab world.

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Via The Wall Street Journal