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U.A.E. Interbank Rates Ease as Dubai Debt Deal Lifts Confidence

United Arab Emirates interbank rates fell to an almost seven-month low after borrowing became cheaper for lenders as the Dubai World debt restructuring progresses.

The U.A.E.’s 3-month interbank offered rate dropped to 2.25375 today, the lowest since March 16, reflecting an easing of the shortage of deposits and willingness of banks to lend. The rate banks charge each other has fallen for eight days.

There is “improved confidence with the improved Dubai restructuring developments,” said Monica Malik, Dubai-based chief economist at EFG-Hermes Holding SAE. “The key issue for banks is medium- and long-term liquidity rather than short-term, this is where the tightness is most acute.”

Dubai World, one of the emirate’s three main state-owned holding companies, said Sept. 10 creditors holding more than 99 percent of the value of its loans approved a plan to alter the terms on $24.9 billion of debt. The emirate last month received orders of about $5 billion for a two-part bond sale in which it raised $1.25 billion in its first sovereign issue since Dubai World’s debt crisis.

U.A.E. banks are owed about 55 billion dirhams ($15 billion) by Dubai World, according to Moody’s Investors Service. Dubai and its state-controlled entities borrowed $109 billion to transform itself into a regional tourism and financial hub, according to estimates by the Washington-based International Monetary Fund. Developing-nation stocks plunged and the cost to protect against a default by Dubai doubled after it said Nov. 25 it would seek to delay repaying loans.

Default Swaps

Credit default swaps tied to Dubai government debt narrowed 5 basis points to 380.5 yesterday, the lowest close since Nov. 24, according to CMA data on Bloomberg. The five-year contracts rose to a record 977 basis points in February 2009, before the U.A.E.’s central bank bought $10 billion of Dubai bonds.

Non-performing loans soared in the U.A.E. and across the Gulf as economic growth slowed after the global credit crisis sparked loan defaults. Provisions for bad loans at U.A.E. banks rose 41 percent in August from a year ago to 37.2 billion dirhams, according to the central bank.

As the credit crisis squeezed local banks, the U.A.E. government guaranteed all local bank deposits and interbank loans, created a 50 billion-dirham credit facility and said it would pump 70 billion dirhams into banks. The central bank cut its benchmark repurchase rate to 1 percent, while Abu Dhabi and the federal government lent $20 billion to Dubai.

“The gap between loans and deposits has narrowed,” said Marios Maratheftis, chief regional economist at Standard Chartered Plc.

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