Emirates intervenes in Dubai debt mess

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

A taxi passes the Gate building

DUBAI, United Arab Emirates — The United Arab Emirates’ central bank said Sunday it would offer additional liquidity to banks, signalling 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 were set to reopen today, 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 banks 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 per cent — 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 neighbouring 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.

UAE 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 was also aimed 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 will likely 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 per cent 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 fuelled by the same oil that Dubai lacks.

Dubai’s debt saga is not new.

It’s been obvious for some time that the emirate owes more money than it can repay. But what remained unclear was the overall extent of the debt load and what officials were doing to avert a panic at a time when the world was in the nascent stages of emerging from its worst recession in over six decades.

UAE newspaper Al-Itihad on Sunday quoted an unidentified Dubai World official as saying the conglomerate, over the past few months, “totally rejected the idea of selling some of its good investment and real estate assets at low prices.”

The official said that any asset sale needed to be in a “commercially fair manner in order to achieve (Dubai World’s) long-term strategic objectives, away from … economic pressures.”

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