Debt poses dilemma of quick fix or not

UAE banks face a dilemma: do they write off their full exposure to Dubai World and other indebted government-related enterprises in one fell swoop? Or do they string out the pain over two years or more? Yesterday's report from the IMF - to the effect that the banks had not yet fully reflected the dramatic downturn in Dubai asset value - put them on the spot. Most have already produced figures for the latest year, with what they believe are adequate provisioning levels for their Dubai-related debt. The IMF clearly disagrees.

Ratings agencies such as Moody's suggest the banks' real exposure amounts to $15 billion (Dh55.09bn). It should be emphasised that this total amount is the local banks' exposure to overall Dubai-related debt, which is $80bn by official reckoning, more than $100bn according to the IMF and other international financial institutions, and as much as $170bn by other estimates. Whatever the true figure, the important point is this: Dubai will be able to service most of its obligations in the normal way. So far, the only chunk we know is at risk is the $26bn up for renegotiation at Dubai World, and that is mainly related to Nakheel.

HSBC, which has a big presence in the UAE, will today reveal its own estimate of provisioning for the emirate's risky debt. We do not know yet what the figure will be, but it will certainly be higher than the local banks' declared provisions. As a big hitter in world markets, HSBC can afford to take a more realistic stance. Local banks will have to follow suit in the course of this year, or endanger their prime capital-adequacy ratios.

Look for big impairment numbers at the half-year stage, and look also for further subvention from the Central Bank to help them over the hump. [e-mail]