Not yet time to press panic buttons

Markets across the world have been pushed to the edge of despair this week, as the US House of Representatives rejected the $700 billion bailout plan for the tottering financial system. While American politicians and policy makers continue to scramble for a solution, investors in the UAE were spared another round of wild gyration in share prices this week as the markets were closed for the Eid Al Fitr holidays.

Worldwide, financial markets have been holding their collective breath, expecting a further meltdown after the bailout scheme was rejected on Monday night. But by the end of trading on Tuesday, most markets in the UK and Europe had avoided another bloodbath amidst hopes that a rescue of the US financial system could still be on the cards. After the initial shock, Asian markets too are holding up.

Lingering doubts on the viability of the US government's enormously expensive bailout plans are expected to keep global markets oscillating between hope and despair for the rest of the week. Hopefully, by the time the UAE market re-opens for trading on Sunday, there could be some certainty on the US rescue package.

Even if the US fails to arrive at one, there is nothing that warrants a panic situation in the UAE. After all, the local financial system is not directly linked to the US and/or the global financial system. In addition, the banking system in the country is largely free from risky US mortgage linked assets that are root causes of the current problems.

Locally, the financial system does not face any immediate systemic threat as most balance sheets are supported by huge cash reserves controlled by governments. Additionally, strong sovereign support in terms of shareholdings makes local banks less vulnerable to international credit events.