|UAE central bank creates emergency cash fund for banks|
Submitted by cpowell on 08:40AM ET Sunday, November 29, 2009.
Section: Daily Dispatches
By Martin Dokoupil and Raissa Kasolowsky
Sunday, November 29,
DUBAI -- The United Arab Emirates' central bank set up an emergency facility
on Sunday to support bank liquidity in the first policy response to Dubai's debt
woes that threatened to paralyze lending and derail economic recovery.
Dubai rocked the financial world on November 25 when it said it would ask
creditors of Dubai World, the conglomerate behind its rapid expansion, and
Nakheel, builder of its palm-shaped islands, to agree to a standstill on
billions of dollars of debt as a first step to restructuring.
As a result, banks face heavy losses and the risk that fearful depositors
could rush to remove cash from the system, and threatening interbank lending
with the second largest Arab economy still facing a downturn this year.
"It might support the market a little bit but I don't think it is enough,"
said Shawkut Raslan, head of brokerage at Prime Emirates brokerage. "I think
some foreigners will take their money of the country and others will be afraid
to put their money into these markets."
The central bank policy move came late on Sunday as Dubai's Supreme Fiscal
Committee gathered to prepare a statement before market open on Monday in an
attempt to reassure investors.
The central bank said it opened a "special additional liquidity facility
linked to their current accounts" at 50 basis points over 3-month Emirates
interbank offered rate (EIBOR), but offered no further details.
The central bank also said the banking system was more sound and liquid than
a year ago, when the global crisis ended the oil and real estate fueled boom in
Arab Gulf, the world's top oil producing region.
The monetary authority said on Saturday it was closely watching events
stemming from the Dubai debt crisis to ensure there is no negative impact on the
Before the Dubai debt crisis, the UAE economy was seen falling by 1.1 percent
this year before returning to a 2.9 percent growth in 2010, a Reuters poll of
analysts showed earlier this month.
Analysts said the central bank's move was a preventive measure to avoid a
possible capital flight and a run on deposits when markets reopen on Monday
after a four-day holiday break.
"It is important because the main concern is that there might be some panic
behavior by depositors in Dubai and by bankers who want to take deposits out of
the banking system," said John Sfakianakis, chief economist at Banque Saudi
Fransi-Credit Agricole Group in Riyadh.
Senior bankers in Abu Dhabi, Dubai's oil-rich cousin in the UAE federation,
told Reuters on Friday Abu Dhabi banks have built up an exposure to Dubai-based
companies worth at least 30 percent of their loan books.
In reaction to Dubai's debt problems, Fitch Ratings has said it downgraded
Dubai Bank, Tamweel, and Bahrain's TAIB Bank.
The facility "would cover the immediate concerns related to deposits in the
UAE banks," said Ghanem Nuseibeh, senior analyst at Political Capital
consultancy. "It doesn't mean that lending would necessarily ease. It is no
guarantee for depositors. We still don't know the extent of the UAE banks'
exposure to Dubai's problems," he said.
State-run Dubai World had $59 billion of liabilities as of August. A large
proportion of Dubai's total debt of $80 billion and repayment of Nakheel's $3.5
billion worth of Islamic bonds, which were originally due to mature on December
14, was widely expected by the market to be met.
Last year the UAE finance ministry poured $6.8 billion into bank deposits,
the first tranche of a $19.1 billion rescue facility it set up to help lenders
weather the onslaught of the global credit crisis.
It deposited another $6.8 billion into banks in November 2008, but has not
made any statements since regarding the remainder of those funds. This came
after the central bank set up a $13.6 billion emergency bank facility to combat
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