UAE central bank sets up emergency facility for banks

The United Arab Emirates' central bank set up an emergency facility yesterday 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 yesterday as Dubai's Supreme Fiscal Committee gathered to prepare a statement before markets open on today 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 three-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 fuelled 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 UAE economy.

Before the Dubai debt crisis, the UAE economy was seen falling by 1.1 per cent this year before returning to a 2.9 per cent 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 today after a four-day holiday break.

"It is important because the main concern is that there might be some panic behaviour 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.

Meanwhile Abu Dhabi, wealthy capital of the United Arab Emirates, will "pick and choose" how to assist debt-laden neighbour Dubai, a senior official said on Saturday, after fears of a Dubai default sent global markets reeling.

"We will look at Dubai's commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts," the official in the government of the emirate of Abu Dhabi said.

Years of chasing business in Dubai's property boom means Abu Dhabi banks have built up an exposure to Dubai-based companies worth at least 30 per cent of their loan books, senior bankers in Abu Dhabi said.