After Dubai World debt panic, UAE guarantees all bank deposits
The United Arab Emirates central bank guaranteed all deposits in the banking system Sunday, seeking to calm markets made nervous by Dubai World's debt payment crisis. Asian markets rose Monday on the news.
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Its next repayment, a $3.5 billion Islamic bond owed by property development subsidiary Nakheel, is due Dec. 14.Skip to next paragraph
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Some analysts say last week's stock market reaction was overblown. Dubai World's debts pale in comparison to the trillions of dollars American banks lost last year and these analysts argue that Dubai's problems are unlikely to spread to other highly indebted countries such as Greece or Spain.
"It was a kind of exaggerated in many ways to expect that Dubai is going to bring the global economy to it's knees again," says Sfakianakis. "Some of the speculators took advantage of the news and forced markets to sell."
Major western banks appear to have limited exposure to Dubai World.
British-based HSBC may have the most risk in the UAE, with $17 billion in loans, according to JP Morgan Chase & Co. But its potential losses on Dubai World may amount to $611 million, Goldman Sachs estimated – a relatively small sum for the global giant.
Abu Dhabi is somewhat shielded from its neighbor's troubles, as it possesses the fourth-biggest reserve of natural gas in the world and one of the largest sovereign wealth funds. Still, it remains vulnerable because many businessmen based in Abu Dhabi have invested heavily in Dubai. Dubai's debt could also make it harder for the entire country to obtain credit.
For now the economic fallout from Dubai World may be exacerbated by the emirate's continued lack of transparency about its financial health. Investors have expressed frustration that Dubai hid its debt problems – even from Abu Dhabi, which was caught off guard by last week's announcement. It refused to reveal its total debt, estimates for which range from $80 billion to $150 billion.
Officials continued to suppress information over the weekend, blocking distribution of the Sunday Times, a British paper, which offered a two-page spread about Dubai's debts.
The crisis, however, could lead to stricter financial monitoring by Abu Dhabi on major creditors like Dubai.
"It would seem that Dubai had an unlimited ability to borrow with the implicit guarantee coming from Abu Dhabi. I think that's an unsatisfactory situation," says Peter Treadway, a consultant with Historical Analytics LLC based in Hong Kong. "They may have some objectives in terms of controlling Dubai in the future, preventing this from happening again."
With Dubai in desperate need of its funds, Abu Dhabi has a strong negotiating position and Mr. Treadway says he hopes that what aid does come will come with strings and caveats. "The markets will respect them more in the long-run if they show a little toughness in negotiating."