The Central Bank of the United Arab Emirates has declared on Sunday that it will “stand behind” debt-laden Dubai by pumping more liquidity into its banking sector. The 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. The central bank will make available to banks “a special additional liquidity facility linked to the current accounts” at the central bank that can be drawn on at a cost of 50 basis points above the three-month Emirates inter-bank offered rate, the Abu Dhabi-based regulator said. The UAE's immediate priority was 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 will do what it can to limit the fallout. 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 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. Mohammed Yasin, chief executive of Shuaa Securities, said: “What the central bank is doing here is pre-empting some of the worries that some of the foreign institutions, like what happened a year ago ... may try to transfer cash out. “I would think foreign institutions will be the initial source of worry ... so the central bank is trying to first of all give those people the piece of mind that they are on top of things, and secondly, to give the very strong message that the funds are there, and they are going to support the banks.” “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.” “It (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. Dubai and Abu Dhabi will be the only Gulf stock markets to open today (Monday), while Kuwait follows on Tuesday. Saudi Arabia's financial market, the largest Arab bourse in capitalization, will remain on holiday until Saturday. Dubai stock market rules limit the index to a change of 10 percent in one day. The markets of Dubai and Abu Dhabi will have only two days of trading before they go again on holiday until Sunday (Dec.6), for the national day. Some economists said the delay in the reaction by Gulf markets because of Eid might reduce the severe impact on those bourses. 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 UAE's banking system is “more sound and liquid than a year ago,” the bank said in its statement, and that it enjoys a “strong base of stable deposits.” The intervention is seen as a step to soothe investors and bank depositors after the shock announcement that state-controlled Dubai World wants to defer payments to creditors until at least May next year. “This is a step aimed to calm investors ... markets should be calmer (than feared) tomorrow,” said Emirati financial analyst Nasser bin Gaith. “This means that banks will be on the safe side,” a UAE official who requested anonymity said. The lingering uncertainty about how Dubai officials will deal with this crisis is another sore point. A top Dubai official on Thursday said more details about the company's plans would be announced in the coming days. But a lack of transparency is endemic both in Dubai and throughout the Gulf. One option is a fire-sale of the conglomerate's assets, though that seems less likely. The most probable scenario, according to analysts, is that Abu Dhabi will step in with a bailout, perhaps cherry-picking the strongest assets to support. There is precedent for this, with the central bank having bought up the first half of a $20 billion bond program launched by Dubai earlier this year. And, on the day Dubai World announced it needed a debt reprieve, the emirate's government announced that two banks, majority-owned by Abu Dhabi, had each decided to buy up a $5 billion bond issue from Dubai. Dubai World pointed out, however, that the money was not earmarked to pay its debt. That only served to fuel speculation about what the federal government and Dubai would do. “If there might be some withdrawals because of the (Dubai World) affair, I would expect full backing” from the UAE, said Eckart Woertz, program manager for economics at the Gulf Research Center in Dubai. “The central bank will do everything that is necessary.” Even if a bank-run is averted, however, UAE officials have plenty of other worries. “Abu Dhabi needs to sent clear signals because the Dubai World debt mess is not just Dubai's problem, but a UAE problem,” said Woertz. 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 the crisis. Investors are keen to discover whether the six-month “standstill” on debt repayments to Dubai World and Nakheel will be voluntary or involuntary. If creditors are not given a choice, the restructuring will be viewed as a default.
