The United Arab Emirates central bank on Sunday pumped more liquidity into its banking sector amid fears that local stock markets may plunge after debt-laden Dubai asked to suspend debt payments.
The intervention is seen as a step to soothe investors and bank depositors after the shock announcement that state-controlled Dubai World wants to halt payments to creditors until at least May next year.
"This is a step aimed to calm investors... Markets should be calmer (than feared) tomorrow," said Emirati financial analyst Nasser bin Gaith.
"This means that banks will be on the safe side," a UAE official who requested anonymity told AFP.
The central bank's move came just before the the stock markets in Dubai and neighbouring emirate Abu Dhabi have their first chance on Monday to react to the disclosure of the debt difficulties, which were unveiled just before the start of a four-day holiday for the Muslim holiday of Eid al-Adha.
|A foreign labourer pictured at the construction site of Dubai's Business Bay on November 27|
The central bank said in a statement, unusually issued during a holiday, that it was providing banks with extra liquidity, stressing its support to the banking sector.
"On practical level,there is no direct impact... Local banks have limited exposure to Dubai World, unlike foreign banks," he said.
British banks reportedly have a total exposure of 30 billion dollars to Dubai World.
And until the UAE stock exchanges reopen on Monday it is uncertain to what extent investors will be reassured by the central bank's statement.
"I expect to see a drop in Dubai's market when it opens Monday... a minimum of two-three percent," Saudi financial analyst Ali Daqaq told AFP. Dubai stock market rules limit the index to a change of 10 percent in one day.
"The banking sector will be the hardest hit, due to exposure to loans, and the danger of default on this debt," he said, speaking before the central bank pledged support for banks.
The central bank said the UAE banking sector stands stronger and more liquid than a year ago and that it enjoys a "strong base of stable deposits."
Other Gulf stock markets have also been on holiday since Thursday for Eid al-Adha, sparing them an immediate impact from Dubai's announcement.
However, the news sent jitters throughout Asian and European stock markets on Thursday and the US market on Friday as investors feared a possible default by Dubai and its state-owned businesses, which together owe 80 billion dollars.
Some economists say the delay in the reaction by Gulf markets because of Eid might reduce the severe impact on those bourses.
"Market fundamentals say that the local market should be negatively affected by the announcement, especially banks and real estate stocks," bin Ghaith told AFP before the central bank announcement.
"The reaction by the global markets was psychological, and came strongly. I expect the reaction here to be less hard because the first shock was absorbed by the global markets," he said.
Dubai and Abu Dhabi will be the only Gulf stock markets to open on Monday, while Kuwait follows on Tuesday. Saudi Arabia's financial market, the largest Arab bourse in capitalisation, will remain on holiday until Saturday.
The markets of Dubai and Abu Dhabi will have only two days of trading before they go again on holiday until Sunday December 6, for the national day.
Gulf investors outside the UAE are worried about contagion from Dubai's problems.
"Even here in Saudi Arabia people are talking about withdrawing from the market when it opens (next) Saturday in fear of the impact of the banks' exposure to Dubai's debt," Daqaq said.
Saudi economist Abdulwahab Abu-Dahesh expects a crash in the region's markets. "I expect Gulf bourses to dive like the September crash last year," following Lehman Brothers bankruptcy, he said.
Dubai does not have big oil reserves, unlike Abu Dhabi which sits on around 95 percent of the UAE's crude deposits.
But doubts have been growing about Abu Dhabi's commitment to buoy Dubai, despite a full subscription by two Abu Dhabi-controlled banks to Dubai bonds worth five billion dollars, announced a few hours before Dubai hinted at debt default.
The once-rapidly-booming economy of Dubai came to a screeching halt -- most noticeably in its real estate sector, after being hit by financing shortage due to the global financial crisis.
Property prices in the once-booming desert city have slumped by 50 percent.
The latest edition of Britain's Sunday Times newspaper was barred from news-stands in Dubai because of a graphic showing the emirate's ruler Sheikh Mohammad bin Rashed al-Maktoum sinking in a sea of debt.
"The Sunday Times was not distributed today," an official from the UAE national media council told AFP, requesting anonymity.
"We cannot accept a personal insult. It is against our traditions," he said.