UAE to back banks amid Dubai meltdown

DUBAI, United Arab Emirates — The United Arab Emirates’ central bank said Sunday it would offer additional liquidity to banks, signaling a push by the federal government to reassure investors worried about the country’s banking sector and its exposure to Dubai’s crushing debt.

Global equity markets are set to reopen Monday, and investors are worried about a routing similar to that seen last week after Dubai’s chief engine for growth, Dubai World, announced it wanted more time to pay some of its roughly $60 billion in debts.

The UAE’s official WAM news agency said the central bank issued a notice to Emirati banks and foreign banks with branches in the country saying it would make available “a special additional liquidity facility linked to their current accounts at the central bank.” The statement said the facility can be drawn upon at a rate of 50 basis points — half a percent — above the three-month Emirates interbank offered rate.

International investors reacted with shock and outrage at Dubai World’s announcement Wednesday that, as part of its restructuring effort, it would ask creditors to delay repayment of its debt and that of its real estate arm, Nakheel, until at least May. Nakheel has a $3.5 billion bond coming due in December.

The company’s roughly $60 billion in debt makes up the brunt of the at least $80 billion Dubai owes as a result of a meteoric decade-long growth boom that saw the tiny city-state transformed into a Middle Eastern Las Vegas, New York and Los Angeles all wrapped into one. Dubai World was a key driver of that growth, with interests ranging from ports to real estate.

In the days since the announcement, Dubai officials have gone to neighboring Abu Dhabi, the oil-rich home to the federal government, for a series of meetings. Some analysts have speculated that the timing of Dubai World’s announcement — on the eve of a three-day Islamic holiday — caught even Abu Dhabi’s rulers by surprise, putting them under pressure to act decisively in a bid to shore up confidence in the country’s banks.

Emirati banks are believed to be shouldering a large chunk of Dubai’s debts, and international ratings agencies have either downgraded the ratings of some of the country’s banks or at least placed them on review for further downgrades, citing exposure to Dubai World’s debt.

The central bank’s statement also was aimed at mitigating any negative fallout on the country as a whole, with concerns that Abu Dhabi would be branded with the same iron of pessimism and skepticism that Dubai likely will endure for years to come.

The UAE’s banking system is “more sound and liquid than a year ago,” the bank said.

Dubai World’s call for more time is seen by many analysts as a classic case of over-extension — a tale of a city-state whose dreams for development propelled it to stardom with its indoor ski-slopes, man-made islands and world’s tallest tower.

But that dream was built on borrowed time and money, and as the global recession hammered Dubai, driving property prices down by 50 percent in a year, forcing layoffs and project delays and cancellations, the emirate no longer had access to the easy credit on which it had pinned its growth.

It simply couldn’t pay.

At the beginning of the year, it launched a $20 billion bond program, of which $10 billion was snapped up by the UAE’s central bank. The same day Dubai World issued its murky statement about a debt extension, the emirate’s government said a new $5 billion bond issuance had been bought up by two banks majority-owned by Abu Dhabi.

While the Dubai World statement made clear that the bonds were not linked to its debt woes, it was obvious that the emirate had little recourse but to turn to Abu Dhabi, whose more conservative growth was fueled by the same oil that Dubai lacks.

Dubai’s debt saga is not new.

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