UAE to back banks amid Dubai meltdown

Economists believe its widely cited debt of $80 billion is probably understated. If this was a tale of one emirate's woes months ago, Dubai World's news turned it into a national crisis.

The central bank's announcement Sunday is the latest indication that Abu Dhabi is not about to allow its high-flying neighbor to derail after a decade of economic growth. The funds would be offered at 50 basis points — a half-percentage point — above the Emirates interbank offered rate.

"This is free money," said Sfakianakis, referring to the low interest rate. But "in the midst of a crisis, you don't really think of the cost of money. The first priority is to maintain liquidity and then worry about everything else."

It is also aimed at mitigating any negative fallout on the country as a whole — and prevent Abu Dhabi from being tainted by the pessimism that could plague Dubai for years.

The UAE's banking system is "more sound and liquid than a year ago," the bank said in its statement.

"If there might be some withdrawals because of the (Dubai World) affair, I would expect full backing" from the UAE, said Eckart Woertz, program manager for economics at the Gulf Research Center in Dubai. "The central bank will do everything that is necessary."

Even if a bank-run is averted, however, UAE officials have plenty of other worries.

"It's a good first step, but markets will be looking for much more," said Sfakianakis.

The Dubai and Abu Dhabi stock markets are likely to take a routing on Monday, analysts said. Dubai's could be particularly hard hit. Elsewhere in the region, the bourse in Saudi Arabia, the Arab world's largest economy, will be spared for a few more days because of the holiday there.

The lingering uncertainty about how Dubai officials will deal with this crisis is another sore point.

A top Dubai official on Thursday said more details about the company's plans would be announced in the coming days. But a lack of transparency is endemic both in Dubai and throughout the Gulf.

One option is a fire-sale of the conglomerate's assets, though that seems less likely.

The most probable scenario, according to analysts, is that Abu Dhabi will step in with a bailout, perhaps cherry-picking the strongest assets to support.

There is precedent for this, with the central bank having bought up the first half of a $20 billion bond program launched by Dubai earlier this year. And, on the day Dubai World announced it needed a debt reprieve, the emirate's government announced that two banks, majority-owned by Abu Dhabi, had each decided to buy up a $5 billion bond issue from Dubai. Dubai World pointed out, however, that the money was not earmarked to pay its debt.

That only served to fuel speculation about what the federal government and Dubai would do.

"Abu Dhabi needs to sent clear signals because the Dubai World debt mess is not just Dubai's problem, but a UAE problem," said Woertz.

1|2

PrintEmail

Write a Comment

Terms

Enter your comments - 3000 characters max

Type in image code

Submit

 Receive China Post promos
 Respond to this email