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Wed 24 Sep 2008 11:58 AM

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Banks left guessing over emergency fund

UPDATE 1: Two days after UAE announcement, details of $13.6bn facility still to be revealed.

The United Arab Emirates kept banks guessing on Wednesday about the structure of a 50 billion dirham ($13.62 billion) emergency funding facility designed to cope with a global liquidity crunch.

Two days after the central bank announced the facility, bankers in the second-largest Arab economy were still wondering if it would buy debt, such as bonds or certificates of deposit, in return for funds or directly inject cash into the system.

They called on the central bank to give more details to avoid adding to uncertainty in financial markets already uneasy over the US financial crisis.

"We need to know at the earliest the modus operandi of this facility because of the constraints in the money markets," said a banker in the money markets division at an Abu Dhabi bank.

"The central bank may deal on a case by case basis and deal accordingly with banks in need of funds. There have been some rumblings but we are expecting details of the terms of the facility very soon," he said.

Central bank officials in treasury and communications departments declined to comment when newswire Reuters called.

The central bank generally communicates policy changes with banks. It made Monday's announcement through the media.

"Transparency is a major issue, we should get more details on how it will work," said Faisal Hasan, head of research at Global Investment House.

"There has been a credit crunch in the UAE because foreign banks stopped interbank lending, and they are major players. We are in a booming economy and there are huge projects that need huge liquidity so local banks need this funding."

UAE interbank rates, which have almost doubled in less than four months, rose on Wednesday, the one-month rate climbing to 3.66875 percent from 3.64375 percent a day earlier.

The UAE facility was announced on the heels of a $700 billion US government bailout plan aimed at easing the crisis that has put pressure on markets around the world, including the Gulf Arab region that is booming on the back of high oil prices.

Elsewhere in the Gulf region, Kuwaiti banks said on Wednesday the central bank would assess their liquidity needs.

Total loans in the UAE, the world's fifth-largest oil exporter have outpaced deposits, with credit surging 49 percent in the year to June to 893.93 billion dirhams. Over the same period, deposits grew 36 percent to 837.66 billion dirhams.

As a result, UAE banks have relied heavily on external funding, many of which have dried up in the global squeeze.

Money market rates have risen more than 170 basis points since early June as liquidity conditions tightened and investors who had piled into UAE dirhams on bets the Gulf state might revalue its dollar-pegged currency exited en-masse.

Bankers said credit was still relatively cheap in the country tackling inflation at 11.1 percent last year, pushing real interest rates sharply into negative territory.

Banks said the facility would help address a liquidity shortage if the central bank offered interest rates lower than those offered on the interbank market.

"There is no clarity on this. Banks and even the markets are waiting," said a treasury manager at another Abu Dhabi bank. "We have no details but we may get some guidance today."

When the central bank replaced a daily sale of fixed-rate certificates of deposit with an auction late last year, the change was communicated to banks the day before the shift.

Since then, the central bank has declined to publicly release auction results. (Reuters)