UAE guarantees banks and deposits

The Government decision comes as effects of credit crisis hit the GCC markets.

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ABU DHABI/WASHINGTON // The Government has guaranteed domestic banks and their deposits in an effort to alleviate fallout from the global credit crisis. The action, similar to emergency measures taken by governments from Ireland to Australia in recent days, puts the Government's backing behind domestic banks and their deposits during the worst global financial crisis since the Great Depression. The measures are intended to encourage banks to resume lending to each other and calm depositors' fears over the stability of the UAE banking system. The decision comes as the effects of the credit crisis have hit the GCC, drying up lending, undercutting equity markets and raising concerns about the health of companies that have borrowed heavily. The Government did not say how long the guarantee would remain in place. In announcing the decision, Sheikh Khalifa bin Zayed, President of the UAE and Ruler of Abu Dhabi, expressed confidence in the strength of the country's financial system. Meanwhile, global financial leaders gathered in Paris and Washington to forge a broader response to deteriorating market conditions. They are attempting to come up with a co-ordinated plan to head off a global economic downturn that is deepening quickly as credit markets are frozen and stock markets fall to new lows. Last week saw the US stock market suffer its worst weekly loss in history, with the Dow Jones Industrial Average falling 18.2 per cent. Markets in Europe and Japan lost more than 20 per cent. GCC markets, which were closed for most of the western market rout late last week, plunged upon opening. The Dubai Financial Market fell 5.4 per cent. Shares of property giant Emaar fell 10 per cent, to 5.13 dirhams (US$1.4), before trading in the shares was stopped under amended exchange rules that limit how far shares can fall in a single session. That is the lowest point for Emaar shares in almost four years. On the Dubai International Financial Exchange, DP World, the Dubai-based ports operator, fell by 18.18 per cent, to 45 cents, two thirds below where the shares originally listed. The Abu Dhabi Securities Exchange fell 2.3 per cent. In Saudi Arabia, the Tadawul rose slightly yesterday after falling sharply on Saturday. It is down 5.6 per cent over two days. In Washington and Paris, world financial leaders raced the clock to try to agree on concerted action before battered markets opened today in Asia. But with the US presidential elections just three weeks away, the divide between governments and the lack of global leadership were cast into stark relief. That added urgency to long-standing calls for reform of international bodies to deal with such crises. The International Monetary Fund warned that time was running out to avert a further meltdown and "strongly endorsed" a weekend statement from the Group of Seven industrialised nations that promised "urgent and exceptional" action. But as of yesterday, few signs of a concrete global response had materialised. European leaders gathered at a quickly organised summit in Paris, while officials of the 185-nation IMF and World Bank met for their annual meeting in Washington yesterday. Jean Claude Trichet, the president of the European Central Bank, appeared to play down the possibility of a quick turnaround in sentiment. "My experience of markets is that it always takes a little time for markets to capture all the elements that we are taking and the principles we are displaying." France promised that the meeting of European leaders in Paris would come up with detailed measures. Nicolas Sarkozy, the French president, and Angela Merkel, the German chancellor, said they had "prepared a certain number of decisions" to present at the European summit. Gordon Brown, the British prime minister, told The Observer newspaper he would try to broker a Europe-wide bailout of banks modelled after Britain's billion pounds bank package. British banks were in talks yesterday to determine how much capital each needed and an announcement was expected today. But European countries have preferred so far to announce individual interventions tailored to their own interests. Germany was said to be preparing a rescue package that could be worth up to US$550 billion (Dh2.02 trillion). Washington, meanwhile, is working quickly to shift the focus of its $700 billion bailout effort toward directly injecting funds into banks. While intended to ameliorate problems in each country, the overall impression left on many was of discord, according to some observers. "Saying that they'll take all steps necessary leaves hanging the question of whether they know what is best and necessary," said Kenneth Rogoff, a former IMF chief economist. "It was a signature moment for the G7. I think markets are going to be very disappointed." The UAE said it would guarantee all interbank lending operations between domestic banks and "inject sufficient liquidity in the financial system if and when necessary". These steps follow the announcement last month of a Dh50bn (US$13.61bn) lending facility from the Central Bank. However, because the Central Bank charged a premium for the emergency funds and placed restrictions on how they could be used, few banks took advantage of it, industry officials said. Even after the Central Bank announced that it would ease the restrictions on the emergency funds, the measure had little effect. The Emirates interbank offer rate (Eibor), which measures how much banks charge each other for short-term loans, continued to rise after the facility was announced, nearly doubling in the last six months to almost five per cent. A day earlier, Sultan bin Nasser al Suwaidi, governor of the Central Bank, said the system was not in danger of sudden cash flight since nationals owned three quarters of deposits in the country. Domestic banks welcomed the move and said the Government's financial muscle was needed to help a system under stress and facing uncertainty. "Confidence is everything and central banks and governments just need to reassure people that the stability is there," one Abu Dhabi banker said. * With additional reporting by H Michael Jalili and Travis Pantin and files from WAM