The United Arab Emirates' central bank yesterday moved to quell fears that Dubai's debt crisis could escalate, by promising to "stand behind" banks in the wake of state-owned infrastructure group Dubai World's request last week for a six-month moratorium on a $3.5bn (£2.1bn) repayment.
The Abu Dhabi-based bank said it would provide a liquidity scheme for both foreign and local banks that had been expecting repayments, effectively covering any short-term losses.
The move was immediately welcomed by Peter Sands, the chief executive of Standard Chartered, the British bank thought to have the biggest exposure to Dubai. "The UAE central bank has acted decisively and pragmatically in announcing new liquidity measures today," he said.
"Their support for the banking system will underpin consumer and market confidence in the economy. We are confident that Dubai, and the UAE as a whole, will work through these issues and continue to prosper as a dynamic and vibrant part of the world," Mr Sands said.
Markets around the world reacted with panic Thursday when Dubai's most indebted entity asked for the payment delay on the eve of Eid al-Adha, normally a three-day holiday. Investors accused Dubai World of timing the announcement deliberately, knowing that they would have the weekend to hammer out a deal before having to face some difficult questions.
Dubai officials, including Abdul Rahman al-Saleh, effectively Dubai's financial minister, broke off their Eid celebrations over the weekend to attend meetings in Abu Dhabi.
Reports over the weekend suggest that Abu Dhabi will extract a high price for any help, with the prospect that Dubai might lose control of key assets, possibly including Emirates Airlines. Abu Dhabi officials said that they would "pick and choose" how to help, and that they were unlikely to "underwrite all of Dubai's debt".
The move by the central bank eases pressure on UK banks, which have long argued that financing companies in the Gulf is effectively quasi- sovereign lending, given the long reach of the state into most firms in the region. Indeed, just hours before Dubai World's terse statement last Thursday, Dubai's department of finance raised $5bn in bonds bought by the National Bank of Abu Dhabi and Al Hilal bank, which is also owned by the Abu Dhabi government.
Dubai World is the borrower of as much as $59bn of Dubai's total $80bn of bonds and loans. UK banks have claims of $50.2bn (£30.4bn) in the wider UAE, out of that country's total debt of $123bn, according to the Bank of International Settlements.Reuse content