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Wed 13 Feb 2013 10:41 AM

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UK bank bailed out after Dubai property gamble

Part of US$70bn used by UK to bail out RBS in 2008 to cover Dubai property deals

UK bank bailed out after Dubai property gamble
Royal Bank of Scotland

Part of a US$70bn fund used by the UK government to bail out Royal Bank of Scotland (RBS) was used to cover the bank’s exposure to the 2008 Dubai property crash, Britain's Chancellor of the Exchequer said.

George Osborne's comments came just days after talks stalled to restructure outstanding debts RBS was owed by an investment vehicle owned by Dubai ruler Sheikh Mohammed bin Rashid Al Maktoum.

At the height of the 2008 credit crisis, British taxpayers were forced to inject billions of dollars to rescue some of the UK's biggest high street banks. Around US$70bn was pumped into the Royal Bank of Scotland (RBS), handing Westminster an 82 percent stake in the lender.

At the same time, the Dubai real estate market was hit by the global downturn in the global sector, with prices tumbling nearly 60 percent with around 50 percent of projects stalled or cancelled.

Osborne said some of the US$70bn bailout, which was tabled by the previous Labour government, was used to cover RBS’s exposure to the Dubai property slump.

“When the RBS failed, my predecessor [Chancellor] Alistair Darling felt he had no option but to bail the entire thing out. Not just the RBS on Britain’s high streets, but the trading positions in Asia, the mortgage books in sub-prime America, the property punts in Dubai,” he said in a speech on banking reform.

“This year we’re going to start separating the high street banking we all depend on from the City trading floor… I want to make sure that the next time a chancellor faces that decision they have a choice. To keep the bank branches going, the cash machines operating, while letting the investment arm fail.

“No more rewards for failure. No more too big to fail. No more taxpayers forking out for the mistakes of others. The same rules for the banking business as any other business in a free market.”

Osborne’s tough stance on banking reform came as RBS, and more than 20 more lenders, held negotiations to restructure nearly US$6bn in debt owed by Dubai Group, a unit of the emirate's ruler's personal investment firm.

Earlier this month, Dubai Group saw an offer of 18.5 cents for every dollar rejected in favour of full repayment over a 12-year period by around 20 banks.

The offer was extended to the banks after earlier being accepted by a separate group of four lenders, including RBS and Standard Chartered, which recently dropped arbitration proceedings against Dubai Group.

“The Chancellor in his speech was referring to the bail out of RBS as a whole. The examples he gave were to illustrate the global nature of the bank's operations and he was not making any specific points about Dubai,” a spokesperson for George Osborne told Arabian Business in an emailed statement.

An RBS spokesperson said the lender had “no comment” on the issue.

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