By Una Galani

MUMBAI, April 27 (Reuters Breakingviews) - Malaysia will bear most of the burden of 1MDB. Abu Dhabi helped the Southeast Asian nation finance the upstart sovereign fund back in 2012. It subsequently looked like the Gulf emirate would share a large part of the multi-billion dollar fallout relating to the fund, now the focus of money-laundering probes around the world. But Malaysia is throwing its chequebook at the problem, paying up to try to repair relations between the two states before Prime Minister Najib Razak seeks re-election.

A debt settlement agreement announced on Monday addresses most of the lingering financial mess. 1MDB will repay a $1.2 billion loan to IPIC by the end of this year. It will also re-assume responsibility for two bonds, which will cost another $4.8 billion including interest.

The Malaysian investor had initially played hardball with Abu Dhabi. It stopped paying coupons on the notes last year after the pair fell out over a separate $3.5 billion payment that went missing. 1MDB paid that amount to an entity with a similar name to a unit of IPIC, which the latter has claimed it never received. Executives from the Abu Dhabi outfit were later named in U.S. lawsuits seeking to seize $1 billion of assets, which prosecutors claim were bought with money stolen from 1MDB. The pair have agreed to enter discussions about this final part of the dispute outside of court. But it is unlikely the funds will be fully recovered.

The entire agreement is backstopped by the Malaysian finance minister - Najib himself. So effectively the outstanding liabilities of 1MDB, now mostly a shell company, sit squarely with the taxpayer. That is, unless one or both sides renege on the deal, as they did with a previous settlement in 2015.

Najib is in a strong position ahead of a general election, which may take place later this year. The opposition is weak and he has few strong internal rivals within the ruling party. But the ongoing global investigations around the vehicle that he helped create could yet throw up nasty surprises – and this deal suggests Najib is uneasy of the threat that poses. Patching up relations with Abu Dhabi removes one potential source of bad news, and is the first step to repairing ties with a key ally, albeit at a high price.

On Twitter https://twitter.com/ugalani

CONTEXT NEWS

- Malaysia and Abu Dhabi on April 24 agreed to settle a debt dispute and move to end arbitration proceedings.

- Disgraced Malaysian fund 1MDB agreed to pay Abu Dhabi's International Petroleum Investment Co (IPIC) $1.2 billion in two installments by the end of December.

- As part of the deal, 1MDB and Malaysia's Minister of Finance will also re-assume responsibility for all future interest and principal payments for two bonds the fund issued, which are worth $1.75 billion each and are guaranteed by IPIC.

- Last April, the Abu Dhabi fund started making interest payments on the notes due in 2022 after the Malaysian fund had stopped paying its dues. Prime Minister Najib Razak is also the country's minister of finance.

- The two sides will also enter "good faith discussions" to resolve other outstanding issues.

- This includes a $3.5 billion payment by 1MDB to an entity with an almost identical name to IPIC subsidiary Aabar, according to two people familiar with the situation. IPIC has said it did not receive the money.

- Two former executives of the Abu Dhabi fund are named in U.S. lawsuits seeking to seize $1 billion in assets bought with money allegedly stolen from 1MDB.

- SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS: http://bit.ly/BVsubscribe

(Editing by Quentin Webb and Kathy Gao)

© Reuters News 2017