If there is one thing markets fear, it is uncertainty. Anyone who doubts that should recall the reaction to Dubai World's call for a debt standstill on the eve of the Eid holiday on November 25 last year. The news went round the world, causing stock markets as far away as Brazil to tumble, and even the price of steel to soften. Since then, with the help of an Abu Dhabi-inspired rescue package, and a team of advisers and consultants ranging from Deloitte's to Rothschilds, a debt restructuring proposal was delivered yesterday to creditors. They are being offered full repayment over a minimum of five years (at a reduced interest rate yet to be determined), with the Dubai Government swapping its debt for equity.
Bankers may moan privately - no bank wants to lend money at other than commercial terms, that's neither profitable nor sustainable - but publicly at least, they appear relatively satisfied. The threat of a haircut, banker-speak for when a borrower insists that lenders will have to take a reduction in their repayments, has receded. Repayment of the principal means that banks will not have to count these loans as losses, while accepting a cut in their interest repayments would be an acknowledgement that they too played a part in Dubai World's overreaching. They will probably view this as a down payment on the cost of doing business in the emirate in the future.
For Dubai World, and its troubled property subsidiary Nakheel, this deal recapitalises the group, and gives it time to either restructure or sell off some of its businesses such as Barney's, the American luxury department store, or Cirque du Soleil, the circus. Some of these assets were bought during the boom. To sell them in a fire sale would have been disastrous. So, it is good news for Dubai, qualified good news for international bankers, and local and international stock markets reacted positively to the announcement. The cost of insuring against Dubai debt default fell sharply, back to a level last seen on November 24, the day before its shock revelation.
It is also a victory for Abu Dhabi's quiet diplomacy and support. Once it became clear that the capital would not be insulated from the fallout, it was forced to act. Its help has strengthened the federation, and shown to any sceptics that the country is united. Creditors still have to agree to the proposal. It would be in everybody's interest if they did so.