Braking news: lenders actually bear risk

In stretched analogical terms, a sukuk is only somewhat like a bond, but not a bond as we know it, as Guambat has repeatedly shrilled.

First, its analogy is to a properly rated bond, not the AAA type ratings agencies have been so free with. This is the lesson from the news of the moment coming out of Dubai. Junk bonds are, after all, also bonds. And the Dubai sukuk have all the shine of junk bonds at the moment.

Dubai World’s Debt Not Guaranteed by Government (Update2)

“It is correct that the government owns Dubai World, but the decision when it was set up was that it should receive financing based on the viability of its projects, not on government guarantees,” Abdulrahman Al Saleh, director general of the emirate’s Department of Finance, said in an interview with Dubai TV, when asked whether the government was backing the debt.

“The lenders should bear part of the responsibility.”

It is this last notion that is so central to the theological principles of Islamic finance that Western financiers find so hard to embrace, even if they pretend to understand.

More of this braking news at Times Online: Investors face huge losses as Dubai abandons debt company

It has also emerged today that Nakheel has requested that all three of its sukuks (Islamic bonds) traded on the Dubai stock exchange be suspended. This includes the $4 billion sukuk due to mature on December 14, which triggered the current crisis.

The group’s statement said the three sukuks would remain suspended “until it is in a position to fully inform the market”.

This may yet turn out to be the feared solvency issue and not a "simple" liquidity one.

Dubai Update

However this isn't just a liquidity crisis - this is a solvency crisis (the assets are almost certainly worth less than the liabilities) - and this does nothing to address the solvency issues.