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Dubai’s sigh of relief

UAE loan buys time and gives options – but which to take?

To say that Dubai’s $10 billion loan facility from the UAE central bank at the end of February is a welcome relief is an immense understatement.

A few days before, Borse Dubai had scraped together a $3.8 billion refinancing facility from a group of lenders. Investors watched the refinancing like hawks, and the deal only went through thanks to a last-minute contribution from government-owned Emirates NBD and Dubai Islamic Bank. A bigger refinancing for local developer Nakheel lies ahead in November.

Investors’ worries about Dubai were exacerbated when Abu Dhabi announced a $4 billion injection of tier 1 capital into five of its banks on February 4. The move put Dubai’s policymakers on the spot, as the Abu Dhabi initiative was a specific emirate one not a federal move. Credit default swap spreads on the biggest Dubai bank, Emirates NBD, widened 100 basis points over the following two days. Over the following fortnight, CDS spreads on one of the two big investment arms of Dubai Inc, Dubai Holding, widened 500bp.

If Dubai is to follow Abu Dhabi’s lead in recapitalizing its financial system, the government will have to inject a similar amount of capital into its four leading banks given that their total equity is almost the same as the Abu Dhabi five, according to Fitch.

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