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Sunday, the Central Bank of the United Arab Emirates said it will provide emergency assistance for all foreign and local banks operating in its seven states after the Dubai debt issue shocked global markets last week.
The Abu Dhabi-based central bank said banks can avail a special additional liquidity facility linked to their current accounts at the central bank at a rate of 50 basis points above the three- month local benchmark interest rate. Further, the central bank said it "stands behind" local and foreign banks.
On November 25, the Dubai World, the emirate's investment company with liabilities of $59 billion, sought a delay of six months to repay its debt. Its subsidiary Nakheel, the developer of palm-islands, has a $3.5 billion Islamic bond maturing on December 14. Dubai World had asked for a delay on maturities until at least May 30, 2010. If creditors grant the request, it will result in a technical default on debt.
The International Monetary Fund welcomed the central bank's decision, while adding that it is continuing to monitor the situation. "We look forward to further clarification by the authorities towards a cooperative mechanism to address the issues between these debtors and their creditors," the Washington-based lender added.
On Monday, Nakheel asked for all three of its listed Sukuk's or listed Islamic bonds to be suspended until it is in a position to fully inform the market. U.A.E's interbank offered rates EIBOR increased to 1.94125 percent on Monday's fixing from 1.91875 percent in the previous fixing on November 25.
The Dubai World debt issue has transformed into a matter of nationwide concern, when the total debt of the country is taken into account. Dubai, a Middle East financial hub, has a total debt of $80 billion, of which the Dubai World's contribution is the highest.
The central bank's announcement is expected to improve investor confidence, which weakened after the Dubai government announced restructuring of the Dubai World. Danske Bank chief analyst Lars Christensen suspects that market participants are still likely to be nervous about the situation in Dubai, despite extended credit facilities. "Gulf markets are likely to be put under further pressure," the analyst said, "and significant spillover into other EMEA markets should also be expected."
On Friday, global stock markets were rattled by the news as investors worried about the possibility of another global financial system contagion. The Dubai debt default issue came at a time when the global economy was starting to feel slightly confident that it has passed the worst of the global financial crisis triggered by the U.S. sub-prime mortgage fallout.
A boom in construction sector has helped to create an image for Dubai as one of the comfortable place for investments. But the credit-crunch had its worst impact on the economy, forcing constructors to halt work and firing thousands of employees.
Following a four-day holiday weekend, Dubai stock markets opened on Monday. Markets in both Dubai and Abu Dhabi plunged at the start of the first trading session since the Dubai World news broke.
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