By Arif Sharif Nov. 30 (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. Markets from Asia to the U.S. fell last week after Dubai World on Nov. 25 announced that it was seeking to delay loan repayments. Dubai’s stock markets will trade on Monday for the first time since the news. Banks will be able to borrow money from the regulator for half a percentage point above the three- month local benchmark interest rate, the Abu Dhabi-based Central Bank of the U.A.E. said in an e-mailed statement yesterday. “This is a timely pre-emptive move from the central bank,” Ahmet Akarli, an economist at Goldman Sachs Group Inc. in London said in a note to investors. The central bank is “ensuring that local markets are operational” and banks “have access to ample liquidity.” 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. That raised the prospects of rising loan losses for U.A.E. and foreign banks. The MSCI Emerging Markets Index gauge of 22 developing countries lost 3.9 percent in two days after the news broke. It advanced 0.5 percent today. The Dow Jones Industrial Average fell 1.5 percent on Nov. 27 to close at 10,309. Cushion Impact The support facility is one of several steps taken by the U.A.E. Central Bank to cushion the country from the impact of the global credit crisis. The bank made 50 billion dirhams available to banks in September last year and guaranteed deposits of all local lenders and some foreign banks the following month to boost confidence. “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.” 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. Default Risk 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. A basis point is one hundredth of a percent. 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 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. ‘More Sound’ 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 shows. To contact the reporter on this story: Arif Sharif in Dubai at asharif2@bloomberg.net

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