UAE Central Bank Makes Reassuring Noises

The United Arab Emirates offered a reassuring statement today after sending a bit more tough-minded message yesterday.

The markets will not doubt take heart from the cheery word today, but we need to remind ourselves that the fat lady hasn’t sung yet. Unlike the conduct of banking authorities in the US towards their wayward charges, it isn’t clear that the UAE is prepared to write blank checks to Dubai.

Let’s first look at the somewhat tough talk of yesterday. From the Telegraph:

“We will look at Dubai’s commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts,” a senior Abu Dhabi official said.

Now consider the posture today, per Bloomberg:

The United Arab Emirates’ central bank eased credit for lenders and said it “stands behind” the country’s local and foreign banks as they face losses from Dubai World’s possible default….

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.

Yves here. So far, so good, but consider: the central bank support extends to banks, not to Dubai World. That means today’s statement is not necessarily a contradiction of the remarks yesterday. The restructuring of Dubai World still appears to be on, and that in turn appears to constitute a credit event on the credit default swaps that reference the relevant entities.

The Financial Times’ tone was more cautious than Bloomberg’s:

The UAE central bank set up an emergency liquidity facility to ease fears about its banking system, but investors remained nervous about the short-term impact on local markets as regional traders digested the global sell-off caused by the announcement that one of Dubai’s flagship entities – Dubai World – was seeking a standstill deal with creditors until May….

Meanwhile, Dubai World is preparing to persuade bondholders of Nakheel, its real estate unit, to roll over that maturity while the government is planning a charm offensive to repair damage caused by a standstill call that followed months of officials downplaying concerns over Dubai’s ability to meet obligations on its $80bn (£48bn) debt pile.

UAE authorities were in talks with Dubai officials over the weekend to formulate a response to investor fears and limit damage to the UAE economy.

Nakheel is due to pay $4bn on its Islamic bond next month, while the parent company has total liabilities of $59bn.

Bankers have been waiting to see if Abu Dhabi, the wealthy capital that bankrolls the central bank and is key to Dubai’s financial well-being, will intervene. But Abu Dhabi has always insisted that such issues have to be dealt with at a federal level….

Reaction to the central bank’s statement was mixed.

Marios Maratheftis, Gulf economist at Standard Chartered, said the move was positive, with the central bank acting proactively to send “a signal to banks and the world that they are behind the banks”.

Raj Madha, banking analyst at EFG-Hermes, welcomed it as a first step, but said the central bank might have to do more.

And there is a wild card in the mix. Lifted from a comment by RueTheDay in an earlier post:

There is an interesting angle here that isn’t being widely reported in the media, at least not yet.

These “bonds” are actually Sukuks, which are a type of Islamic Finance intended to get around the Islamic law that forbids the charging of interest on debt. They’ve only existed for around 7 years. It’s actually not a bond at all. They create an SPV for the issuing entity that owns all of its assets, the sukuks represent what appears to be an equity interest in the SPV backed by the underlying assets, and the payments are not “interest” but rather “rent” for the use of the assets. No idea what the courts will make of this in the event of a default.

So there is a possibility that this structure will be tested in the default and found to be wanting. And that could redound to all other debt like this. Remember when suddenly no one wanted anything to do with anything that might be tainted with subprime?

Independent of any rescue, a lot of investors and lenders will lose out on the collapse of the Dubai bubble. So the jury is still out on the ultimate costs.

Update 11:00 PM: Reuters, weighing in later, gave an even less positive reading:

But the move to inject liquidity into Dubai’s banks by the central bank of the Gulf Arab state, together with promises by neighboring city-state Abu Dhabi to provide selective support to Dubai companies was seen as by analysts as the bare minimum.

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18 comments

  1. Skippy

    A short video clip to express my view on anything Dubai.

    Julia if they just followed your simple recipe with out trying to be so bloody clever and over load the circuit’s of debt, come on 15 amps per circuit. Old wiring with new appliances never works out down the road and your left with wet and sooty smelling abode if not burnt to the ground.

    Link: http://www.youtube.com/watch?v=Yil2jWQ5Oqg&feature=related

  2. dfb

    This is political posturing on the part of Abu Dhabi. I think it likely that Abu Dhabi bails out Dubai World in return for most of its assets with value. Dubai will be little more than a puppet of Abu Dhabi a year from now, if not officially ruled by it.

    1. Skippy

      Yeah, I saw your back yard landscaping!

      Good on you for creating a desert in the northern latitudes, your brining down the water bills, electricity bills, landscaping labor per hr, jeopardizing the hole economic system, fool!

      Skippy…repent now[!] and contribute to the economy by re-landscaping in the most intensive backyard on the planet please, silly man its all about jobs or did you not get the memo.

    1. DownSouth

      al,

      Great link!

      So the UAE central government is now being called upon to do the same thing the US federal government did last year, which is to bail out a bunch of neoliberal criminals. The parallels are stiking.

      I loved this comment:

      Really the problem is very much centered around perception and confidence.

      One has to wonder where illusion completely replaced reality.

      The great thing about Dubai—a totally artificial oasis created solely by man in the middle of the desert—is that it offers a dual example of man’s unbelievable arrogance. He believes he can not only control physical nature, but human nature as well.

      Where do the seeds of this belief that human nature is putty in the hands of man come from? Hannah Arendt in The Human Condition dates it to Adam Smith:

      The conception of political economy as primarily a ‘science’ dates only from Adam Smith and was unknown not only to antiquity and the Middle Ages, but also to canonist doctrine, the first complete and economic doctrine which differed from modern economics in being ‘art’ rather than a ‘science.’ Classical economics assumed that man, in so far as he is an active being, acts exclusively from self-interest and is driven by only one desire, the desire for acquisition…

      It is the…assumption that men behave and do not act with respect to each other, that lies at the root of the modern science of economics, whose birth coincided with the rise of society and which, together with its chief technical tool, statistics, became the social science par excellence. Economics—until the modern age a not too important part of ethics and politics and based on the assumption that men act with respect to their economic activities as they act in every other respect—could achieve a scientific character only when men had become social beings and unanimously followed certain patterns of behavior, so that those who did not keep the rules could be considered to be asocial or abnormal.

      The laws of statistics are valid only where large number or long periods are involved, and acts or events can statistically appear only as derivations of fluctuations. The justification of statistics is that deeds and events are rare occurrences in everyday life and in history. Yet the meaningfulness of everyday relationships is disclosed not in everyday life but in rare deeds, just as the significance of a historical period shows itself only in the few events that illuminate it. The application of the law of large numbers and long periods to politics or history signifies nothing less than the willful obliteration of their very subject matter, and it is a hopeless enterprise to search for meaning in politics or significance in history when everything that is not everyday behavior or automatic trends has been ruled out as immaterial…

      The victory of animal laborans would never have been complete had not the process of secularization, the modern loss of faith inevitably arising from Cartesian doubt, deprived individual life of its immortality, or at least the certainty of immortality… Modern man, when he lost the certainty of a world to come, was thrown back upon himself and not upon this world; far from believing that the world might be potentially immortal, he was not even sure that it was real. And in so far as he was to assume that it was real in the uncritical and apparently unbothered optimism of a steadily progressing science, he had removed himself from the earth to a much more distant point than any Christian otherworldliness had ever removed him.

      1. al

        So you like my horses? What about the flowing fabric? I’m still waiting for my interview this year Maria, how come you have not called?

  3. uggs

    The early spring is precisely the myriad things recovery buds, she in yun the product, she in breeding, she in the waiting, she is gathering the potential due-out, you may be able to feel, deadwood pan-green, the flower is in bud, from few to many, from pale to thickness. One day, she will blot out the sky, a school of vitality, will present one to beautifully make up, the profusion of color spring.

  4. attempter

    This morning’s NYT

    http://www.nytimes.com/2009/11/30/business/global/30contagion.html?hp

    is funny.

    Trying to prevent a run on its banks, and financial turmoil that some fear could spread globally, the United Arab Emirates helped calm financial markets Monday with its pledge to lend money to banks operating in Dubai, an action that came amid concerns about excessive borrowing around the world.

    That’s what it says as of 3:55 AM EST. I didn’t know news reportage was supposed to write the future.

    The article does report that things are calm in Asia so far, but I don’t think Monday’s over until it’s over in the Western hemisphere. Just a suggestion for the editors.

    The whole article has kind of a wishful tone to it, like the authors are trying to convince themselves above all that’s everything’s fine.

  5. But What do I Know?

    Let’s just say the Abu Dhabi might drive a better deal with the bondholders than the US Treasury :>)

  6. bankster

    A restructuring will not necessarily result in a CDS credit event. In fact, most recent debt restructuring have not been deemed credit events. Of course, restructuring isn’t even a defined event in newer CDS contracts (although I’m not sure if Dubai contracts are on the new standards yet).

  7. DWIGHT BAKER

    Rules of the Jungle
    Large Carnivores eat what they will
    By Dwight Baker
    November 30, 2009
    Dbaker007@stx.rr.com

    Birds Eye View brought to you by We the People Advocates

    Those humans that have the insatiable Need for Greed worship self and have become the Large Carnivores among mankind that are cannibal. They have intentionally refused to honor and lost conscience thus they believe they are not subject to the God of Creation. During and after that transition they seek out others who have arrived at that same summit.

    Godless humans who only revere and worship money and power, that gives them the supremacy to devour what humans they will. Thus I call them Predator Beast.

    They are anti-god—anti-Christ—godless humanity that have sold their mortal souls to the work of the evil tyrannical world system that was born long ago in the hearts of those that saw mankind as their slaves to do their bidding of building.

    During the Egyptian, Babylon, Persian, Greek and Roman Empires the rulers discovered that underlings were needed to take over conquered land, the term used in history for those folks is benefactors. They were the ones in the senate or other governing jobs as dignitaries that served to enter to entertain the King in his courts.

    As usual the greatest segments of wealth were derived from foodstuff, natural resources and industry. Thereby the benefactors managed the conquered indigenous people land and their ongoing work projects or industry that were a part of the conquest.

    Thus slave labor was born out of the Need for Greed by the Predator Beast. And to despite all the good words that circulate today about slavery being dead and gone from mankind that is simply not true.

    QUOTES BY FREDRICK DOUGLAS 1818 —– 1885
    No man can put a chain about the ankle of his fellow man without at last finding the other end fastened about his own neck.

    The life of a nation is secure only while the nation is honest, truthful, and virtuous.
    http://en.wikipedia.org/wiki/Frederick_Douglass

    During our time in history an enlighten wave of new thought has surfaced for those who are astute and have used common sense and reason along with conscience to govern their mortal lives. Many have come to know first hand of the godlessness

    The super moneyed elite knows NO boundaries when it comes to pirating. The bank failures proclaimed in 2008 were a ponzi scheme by the super rich to steal from those many of little wealth, they pulled that off with not much of a problem. So some stolen from just went on their way and said OH HUM. Will make it back.

    Now the next Sonoma wave to take away from those on up the financial ladder is underway. It like the first supposed failure is a con or Ponzi scheme to steal from the millionaires and billionaires not in the fold as an appointed benefactor.

    Thus the pirating of and consolidation of fortunes is at its next juncture.

    Are you still trying to out smart the Predator Beast who hold the marked deck of financial cards?

    Arab Emirates Aim to Limit Dubai Crisis in Pledge to Banks
    By VIKAS BAJAJ and GRAHAM BOWLEY

    “Dubai could be the beginning of a series of sovereign debt issues or crises,” said Mohamed A. El-Erian, chief executive of Pimco, the giant bond-trading firm. “What Dubai is going to do is make people think more intensely about the lagging implications of last year’s crisis. It’s going to be a wake-up call to the people who thought that the financial crisis was just a flesh wound.”

    A short video about Dubai and its slavery and opulent wealth taunted to entice some to come join in.
    http://www.brasschecktv.com/page/740.html

    Another article today — Please consider the source—- Are they trustable?
    UAE Central Bank Makes Reassuring Noises

    1. DownSouth

      Dwight,

      Thanks for the ABC television video.

      No unions are allowed.

      Strikes are illegal.

      What a friggin neoliberal cesspool.

  8. Kay4

    Lets hope that Abu Dhabi won’t make the same mistake as the US made last year if they give money to Dubai.

Comments are closed.