United Arab Emirates' central bank offers aid to Dubai

By Andrew England and Simeon Kerr
Washington Post Staff Writer
Monday, November 30, 2009

ABU DHABI, UNITED ARAB EMIRATES -- The United Arab Emirates' central bank stepped in Sunday to head off pressure on banks and any potential capital flight as federal authorities tried to counter concerns over Dubai's debt problems.

The bank set up an emergency liquidity facility, but investors remained nervous about the short-term impact on local markets as regional traders digested the global sell-off caused by the announcement that one of Dubai's flagship entities, Dubai World, was seeking a standstill agreement with creditors until May.

Because of an Islamic holiday, stock markets in Dubai and Abu Dhabi open Monday for the first time since Dubai World's shock statement on Wednesday. Some brokers are now predicting that stocks in Dubai and Abu Dhabi will drop to their limits, with banks likely to be hit hard.

As part of its efforts to calm investors' nerves, the UAE central bank said it would provide banks with access to fresh liquidity and pledged to stand behind UAE banks and branches of foreign banks. "The central bank stated that the UAE banking system is more sound and liquid than a year ago," a statement said.

Meanwhile, Dubai World is preparing to persuade bondholders to roll over the maturity while the government plans a charm offensive to repair damage caused by a standstill call that followed months of officials playing down concerns over Dubai's ability to meet obligations on its $80 billion debt pile.

UAE federal authorities were in talks with Dubai officials over the weekend to formulate a response to investor fears and limit damage to the UAE economy.

Dubai World's main property arm, Nakheel, is due to pay $4 billion on its Islamic bond next month, while the parent group has total liabilities of $59 billion.

Bankers have been waiting to see if Abu Dhabi, the wealthy capital that bankrolls the central bank and is key to Dubai's financial well-being, will intervene. But Abu Dhabi has always insisted that such issues have to be dealt with at a federal level.

UAE officials have also said that while they would support all members of the seven- emirate federation, Abu Dhabi would not simply write Dubai a blank check.

Reaction to the central bank's statement was mixed.

Marios Maratheftis, Gulf economist at Standard Chartered, said the move was positive, with the central bank acting proactively to send "a signal to banks and the world that they are behind the banks".

Raj Madha, a banking analyst at EFG-Hermes, welcomed it as a first step, but said the central bank might have to do more.

-- Financial Times

Kerr reported from Dubai.

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