UAE central bank offers financial vow to cut fears on Dubai

Published on Sunday 29 November 2009 20:41

THE central bank of the United Arab Emirates moved to calm financial markets' fears yesterday when it said it "stands behind" local and foreign banks operating in the country.

The central bank said it would offer them access to money in a clear sign the Gulf Arab nation's federal government is racing to curtail investor fears over Dubai's crushing debt.

In a notice to Emirati banks and foreign banks with branches in the country, the central bank said it would make available "a special additional liquidity facility linked to their current accounts at the central bank".

The statement comes days after markets reacted with shock to news conglomerate Dubai World wanted creditors to give it a six-month extension on paying some of its $60 billion (35.8bn) debts.

Yesterday's development came as financial markets braced themselves for a further stormy ride today as debt-laden Dubai's rich neighbour, Abu Dhabi, warned there would be "no blank cheques" to bail them out.

One analyst said: "The markets are definitely in a highly skittish mood. There could well be some strong selling in London first thing, although I doubt it will be any sort of bloodbath. The sums, internationally speaking, are not that big."

The FTSE index of Britain's top 100 blue-chip stocks shed more than 3 per cent of its value on Thursday when Dubai's major problems became apparent.

However, the Footsie ended up in positive territory on Friday, while the Dow Jones index on Wall Street ended the session off 154 points, or 1.5 per cent.

Bryan Johnston, executive director at broker Brewin Dolphin in Scotland, said: "Abu Dhabi was bound to say there would be no blank cheque. They could hardly say to Dubai, 'Go ahead, you can play fast and loose'.

"But the fact remains the cavalry will arrive. It would be too damaging for Arab prestige and economic standing in the world for it to be allowed to fail."

Johnston said markets were nervous but "need to calm down".

He added: "Moral hazard does not exist for something like this. It is one thing to allow Borders bookshops to go down, quite another to allow Dubai to collapse."

Sheikh Mohammed bin Rashid al-Maktoum, emir of Dubai, is under pressure to explain the extent of the debt problems.

Dubai World, the state holding company, this week suspended repayments on a $3.5bn (2.1bn) Islamic bond due in December.

An Abu Dhabi senior official was quoted as saying: "We will look at Dubai's commitments and approach them on a case-by-case basis. It does not mean Abu Dhabi will underwrite all their debts."

Stock markets worried late last week about the prospect of a major sovereign default, raising disturbing echoes of the Russian debt default and rouble devaluation in 1998 at the tail-end of the Asian financial turmoil.

Shares in banks including HSBC and Royal Bank of Scotland plunged last week on uncertainty about the scale of their exposure to loans from Dubai World.