UAE opens liquidity taps

Dubai: The UAE Ministry of Finance on Thursday set the terms of emergency funding for local banks to enable them to tide over the inter-bank liquidity squeeze, but warned them not to use the cash being made available under a multi-billion package for speculative activity.

The Government said it will make funds available on the basis of interest payable every three months calculated on the prevailing interest rate for five-year US Treasury bonds, plus 120 basis points or 4 per cent, whichever is higher. One hundred basis points equal one percentage point.

The UAE has pledged Dh70 billion to ease the strain on the financial system caused by the global economic crisis.

Banks must follow strict guidelines in order to tap the cash injection the government is offering.

They are required to use the money to participate in the inter-bank loan market and ensure credit facilities are available to small and medium enterprises at reasonable cost. The ministry said banks should use the money to support the local financial system and economy and not "the speculative opportunities in local and foreign markets".

They have also been told to invest in their risk management practices to ensure they meet the requirements of the Central Bank.

The ministry warned that action will be taken against banks if they do not adhere to the guidelines.

A senior banker said the interest rate proposed by the ministry would not have an adverse impact on banks. "In the current environment it appears to be fairly reasonable. The main concern the system has right now is of access to liquidity and it is less of an issue of pricing," said Sanjay Uppal, chief financial officer of Emirates NBD bank.

Former US Federal Reserve Chairman Alan Greenspan, describing the current financial crisis as a "once-in-a-century credit tsunami" acknowledged on Thursday that the crisis has exposed flaws in his thinking and in the workings of the free-market system.

The global turmoil appears to have slowed down the Gulf's economic boom supported by high oil prices. Stock markets in the Gulf and Asia declined yesterday. Positive third-quarter results in the region have failed to lift the gloom prevailing among investors who fear a recession.

For the Gulf countries, particularly Saudi Arabia, Kuwait and the UAE, oil is still the major foreign exchange earner, despite significant progress towards diversification. "All investments made abroad have either lost value or have much lower income generation capacity due to the crisis and the economic slowdown," Armen V. Papazian, a senior economist, said.