UAE central bank sets up liquidty facility for banks

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The United Arab Emirates' central bank set up a facility on Sunday to support liquidity in the banking system Dubai's government sought to delay debt payments from two of its flagship firms, sending global markets lower.

Dubai rocked the financial world on November 25 when it said it would ask creditors of Dubai World, the conglomerate behind its rapid expansion, and Nakheel, builder of its palm-shaped islands, to agree to a standstill on billions of dollars of debt as a first step to restructuring.

"(The) central bank has issued a notice to UAE banks and branches of foreign banks operating in the UAE, making available to them a special additional liquidity facility linked to their current accounts at the central bank, at the rate of 50 basis points above the 3 months EIBOR (Emirates interbank offered rate)," it said in a statement.

The bank did not give more details, only saying that it stood behind UAE banks and branches of foreign banks operating in the UAE, adding the Gulf Arab country's banking system was more sound and liquid than a year ago.

"It is important because the main concern is that there might be some panic behaviour by depositors in Dubai and by bankers who want to take deposits out of the banking system," said John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole Group in Riyadh.

"This will support the liquidity and the overall soundness of the banking system in the UAE and especially in Dubai. The central bank is sending a strong message to everyone that they are providing ample liquidity and the guarantee to banks in the UAE," he said.

State-run Dubai World had USD 59 billion of liabilities as of August, a large proportion of Dubai's total debt of USD 80 billion and repayment of Nakheel's USD 3.5 billion worth of Islamic bonds, which were originally due to mature on December 14, was widely expected by the market to be met.

Last year, the UAE finance ministry poured USD 6.8 billion into bank deposits, the first tranche of a USD 19.1 billion rescue facility it set up to help lenders weather the onslaught of the global credit crisis.

It deposited another USD 6.8 billion into banks in November 2008, but has not made any statements since regarding the remainder of those funds. This came after the central bank set up a USD 13.6 billion emergency bank lending facility to combat the crisis.