Sunday, November 29, 2009

U. A.E. to use special facility in support of banks liquidity needs

Here is an article from a reporter for Bloomberg. This is good for depositors who are worried.

Nov. 29 (Bloomberg) -- The United Arab Emirates’ central bank said 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.
Banks will be able to use a special facility tied to their current accounts that can be accessed at a cost of 50 basis points above the three-month local benchmark interest rate, the Abu Dhabi-based regulator said in an e-mailed statement today.

“This is a very reassuring move by the central bank 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.”
Dubai World, a state-owned holding company struggling with $59 billion of debt and other liabilities, said Nov. 25 it would seek a standstill agreement with creditors and an extension of loan maturities until at least May 30, 2010. The news led to a slump in financial markets around the world and raised prospects of new loan losses for U.A.E. and foreign banks.

The benchmark three-month Emirates interbank offered rate was at 1.919 percent on Nov. 25, the last working day before a religious holiday, according to Bloomberg data. The U.A.E. has 24 local banks and 28 units of foreign lenders operating in the country, including those of Citigroup Inc. and HSBC Holdings Plc.

Risk Increases

The cost of protecting Dubai government notes from default more than doubled to 647 basis points in three days after Dubai World announced plans to delay loan repayments, according to CMA DataVision prices. The swap contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. There are 100 basis points in a percentage point.

Dubai, the second-biggest of seven states that make up the U.A.E., and its state-owned companies borrowed $80 billion to fund an economic boom and diversify its economy. The onset of the global credit crisis and a decline in property prices hurt companies like Dubai World as they struggled to raise loans and forced the emirate to turn for help to Abu Dhabi, the U.A.E. capital and holder of 8 percent of the world’s oil reserves.

U.A.E. banks are already facing rising loan losses stemming from the global recession as the economy slowed and two Saudi Arabian business groups defaulted on at least $15.7 billion of loans. Provisions for bad loans at U.A.E. banks rose to 2.76 percent of the total as of the end of October from 1.92 percent a year ago, according to central bank data.

The U.A.E.’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 percent over the period, the central bank said. Foreign interbank deposits make up only 5 percent of the total, it said.

Dubai World, which owns property developer Nakheel PJSC, the builder of palm-tree shaped islands off the emirate’s coast, has $40 billion of debt, two bankers familiar with the company said Oct. 21, declining to be identified because the information is private. Some $18 billion of Dubai World’s debt is with companies such as port operator DP World Ltd. that have sufficient cashflow to service their loans, the bankers said. The remaining $22 billion is of greater concern, they said.

The U.A.E.’s banking industry is already the biggest among the six Gulf Arab states including Saudi Arabia, Kuwait and Qatar, with 1.54 trillion dirhams ($418 billion) in assets, central bank data show. Arif Sharif in Dubai.

This article does say that the banks saw the problem and shrunk their assets so that provisions for bad loans would be a larger percentage of assets. It also makes the bad loans a larger percentage of assets. The article does not say how the banks holding debt worth a lot less than the balance on their books will deal with the problem. Here is a chance for federal authorities in the U.A.E. to ask for responsibility for taking on too much risk. Expect to see accounting shenanigans like what US taxpayers got after Citigroup and Bank of America and other too big to fail institutions (remember the shadow banks?) hooked up with the buds at Treasury and the Fed. The problem will get new accounting treatment to make it look not as bad as it is. The problem will get less coverage in the too-well-connected-press by the end of this week. And within a couple of years we'll find out there really was a need for a solution, before it got bigger. Not only in the U.A.E.

Here is a link to an interesting New York Times article on the subject of the Dubai debt problem. It includes comments from Simon Johnson, Mohamed El-Arian and Nouriel Roubini.