Dubai Crisis: Central Bank - Lender of The Last Resort
Wednesday, December 2, 2009
The Central bank of the United Arab Emirates (UAE) has said that it "stands behind" the country's local and foreign banks, which face losses from Dubai World's possible default, and offered them access to more money under a new facility. The central bank sought to reassure UAE banks and foreign banks operating in the country about Dubai's financial difficulties, sending a strong message that it was willing to provide ample liquidity and guarantee to banks.
Dubai World, a state-owned investment company struggling with $59 billion ([euro]39 billion) of debt, said last week that the firm and its main property subsidiary Nakheel would seek a "standstill" agreement with creditors.
This led to a slump in global markets and raised prospects of rising loan write-offs for Emirates and foreign banks in Dubai, which has total debts of $80 billion.
The central bank said it would make available to banks "a special additional liquidity facility linked to the current accounts" at the central bank that can be drawn upon at a cost of 50 basis points (0.5 per cent) over the three-month Emirates inter-bank offered rate, the Abu Dhabi-based regulator said.
"This is very a reassuring move by the central bank in order to limit the risk of any run on Dubai-based banks," said John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh. It will alleviate any "liquidity concerns by foreign banks about the banking system, mostly those based in Dubai", he said.
The UAE's banking system is "more sound and liquid than a year ago" and local banks' sale of medium-term notes and commercial paper in foreign markets has declined by 25 per cent over the period, the central bank said.
Foreign deposits make up only 5 per cent of overall interbank deposits, the central bank said.
- Bank of Ireland is owed [euro]50 million by Dubai World, while Allied Irish Banks has no exposure.
- Oil-rich Abu Dhabi is putting together a rescue package for Dubai, according to weekend reports, as senior officials in the Gulf state met to tackle the crisis.
- Officials said Abu Dhabi would not be writing a blank cheque for its neighbour, according to reports, and Dubai's commitments would be dealt with on a "case by case" basis.
- Banks that lent more than $30 billion to Dubai World plan to appoint auditors KPMG to represent them in talks over recovering their money, it was also reported.
- The banks include Britain's biggest bank HSBC, Royal Bank of Scotland, Lloyds Banking Group, and Standard Chartered.
- KPMG will be formally appointed once the creditor banks have created a steering committee comprising five or six of the main lenders to lead the negotiations.
Accountants Deloitte have been appointed advisers to Dubai World to help the company restructure its debts. The firm had a $3.5 billion bond payment due next month but wants breathing space from all debt repayments until the end of May.
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 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 lending facility to combat the crisis.
Dubai World's investments range from Turnberry in Scotland, host of the 2009 Open golf championship, to the luxurious Palm manmade islands being developed by Nakheel. The company has also invested in the QE2 cruise liner, Emirates airline and the Travelodge budget hotel chain. Dubai World may seek to sell assets to solve its debt crisis
Labels: Dubai Crisis
posted @ 11:27 AM,
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