Problems for Dubai are only just beginning over future of Islamic bond: report

Dubai, the flighty sibling emirate of the more sober and richer Abu Dhabi, is dragging the financial reputation of the entire Gulf region through the gutter. Tales this year of sports cars abandoned at Dubai airport as their expat owners fled harsh bankruptcy laws were embarrassing enough. Now the financial crisis is bringing into public view more serious problems.
The regions financial markets are being scrutinised; the Gulf sovereign wealth funds that prowled the world, snapping up prize assets, including stakes in Citigroup, the American bank and Daimler, the German car company have suffered big losses. Even more shameful, the legal underpinning of a trillion-dollar market in Islamic bonds is being tested.
Dubai was sold to the world as a place where West and East could do business during the day and play at night. For Saudis and Iranians, it was an Aladdins cave of sensuous delights. For Western bankers, it was a tax-free oasis where alcohol and money flowed. Contrary to popular belief, Dubai was never cheap. Everything in the emirate is imported, including the construction workforce which last year began to protest against their appalling conditions. Housed in trailers and building skyscrapers in temperatures of 40C (104F), Indian and Pakistani workers rebelled when soaring food costs began to erode the money they could send home.
For Dubais rulers, however, the real problems are only now beginning as the city state seeks to delay the repayment of an Islamic bond. The money owed by Nakheel, the state-controlled developer of the Palm, is in the form of sukuk, a financial instrument devised by Islamic scholars to comply with the Islamic prohibition on the payment of interest on money.
With soaring oil prices, Islamic finance blossomed but the protection offered to bondholders by sukuk was never tested in any court. Western bankers and lawyers were told that the Gulfs rulers would rather pay than allow the embarrassment of a default and a quarrel between creditors. That promise of the monarchs munificent blessing is about to be tested. Foolish, improvident Dubai has asked its big brother in Abu Dhabi for help; will the desert caravan arrive in time?(The Times)