Local UAE banks holding up $24.8bn Dubai World debt rescheduling
Posted on 24 April 2010 with no comments from readers
Local UAE banks are the only impediment to reaching a settlement of the $24.8 billion Dubai World debt rescheduling, The National reported today citing local sources. International banks are able to refinance their loans more cheaply than the local banks and are understood to be already satisfied with the terms on offer.
Meanwhile, the UAE Central Bank is said to have held talks with the local banks late last week about how the restructuring process would affect provisions for lost interest payments. One Arabic paper said that the banks would not have to make any immediate additional write-offs.
Favoring international banks
However, the biggest stumbling block for the local banks is that by treating the international banks on a level playing field, the restructuring proposal is actually disadvantageous to them.
International banks like HSBC, RBS and Standard Chartered are currently able to borrow very cheaply and so refinancing imposes a lesser cost on them than the local banks such as Emirates NBD and Commercial Bank of Abu Dhabi whose new finance will be referenced to the Emirates Interbank rate. Eibor is presently around 2.3 per cent against 0.6 per cent for the London Interbank rate.
The higher the cost of refinancing the greater the loss to the banks. Hence, local banks face larger write-downs from the Dubai World restructuring than the international giants.
Counter proposals
According to The National, local banks have made a counter proposition that has interest rates tied to Eibor or Libor depending on the currency used in making the original loans. That would go someway to solving the problem but those lending in dirhams, as is probably be the case for most local banks, would still lose out.
In any case local observers will be relieved to hear that negotiations have moved this far, and do not seem far off a successful conclusion. The devil was always going to be in the detail but this does not look an insolvable issue.
Contractors are already bracing themselves for a rumored $8 billion cash injection in June as the monies from the rescheduling process find their way back into the right pockets. That will be a powerful cash injection into an economy as small as Dubai, and it will mark an important stage in the recovery from the property crash last year.
