UAE to back banks amid Dubai meltdown

The UAE's immediate priority was arguably to avert any run, however unlikely, on banks by panicked depositors. But the promise of cheap funds also signaled to global investors that the country's federal government — backed by oil money — will do what it can to limit the fallout from its indebted emirate's woes.

In a statement Sunday, the UAE's central bank said it had sent notice to Emirati banks and foreign banks with branches in the country making clear they would have access to "a special additional liquidity facility."

The offer comes after Dubai World, the conglomerate that has long been the chief engine behind Dubai's explosive growth, on Wednesday announced it needed at least a six-month reprieve from paying its roughly $60 billion debt. The news sent global markets tumbling.

Mideast markets were unaffected because of an extended Islamic holiday, but they reopen Monday.

"There is concern," said John Sfakianakis, chief economist at the Riyadh, Saudi Arabia-based Banque Saudi Fransi-Credit Agricole Group. "They're trying to take preventive measures in order to lower the risk of a run on the local banks."

"Depositors could very well panic ... and they could decide to take their money out of the banking system," he added.

The UAE has been guaranteeing bank deposits since October 2008, but the pledge for new help at generous terms stems from concern that UAE banks have some of the biggest exposure to Dubai World's debt. Several have been downgraded by international ratings agencies or been placed on review for downgrades.

It also comes as Dubai officials, who have sought to play down the semiautonomous emirate's financial woes in the wake of the world's worst recession in over six decades, are shuttling to and from Abu Dhabi, the oil-rich home to the UAE's federal government.

Ostensibly, the discussions, which have not been made public, are about how to move forward after a year that saw Dubai's economy plummet.

Real estate prices in the emirate have fallen by 50 percent over the past year. Many of the multi-billion dollar projects for which Dubai became famous were either scrapped or delayed, and people started losing their jobs.

As the global credit crunch hit last year, it dried up the cheap cash on which Dubai — the Middle East's version of Las Vegas, Disneyland, Wall Street and sometimes Sodom and Gomorra — had built its fortunes.

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