UAE offers hand to banks in Dubai
DUBAI, United Arab Emirates – The United Arab Emirates has pledged to stand behind foreign and domestic banks in the country, offering additional money while extolling the strength of the Gulf nation’s financial sector as world markets brace for a potential day of reckoning today over Dubai’s crushing debt.
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 today.
“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.
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.
In place of mile-high dreams epitomized by Burj Dubai, the world’s tallest tower now nearing completion, Dubai’s new reality appeared to be that it had simply overreached.
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.
“In the midst of a crisis, you don’t really think of the cost of money,” Sfakianakis said. “The first priority is to maintain liquidity and then worry about everything else.”