The United Arab Emirates' central bank has bought $10 billion worth of bonds issued by Dubai after the emirate struggled to raise funds as the global credit squeeze pushed up the cost of credit, ending the nation's five-year real- estate boom ended, Bloombeg reported.
The sheikhdom will sell a total of $20 billion of securities under the program, Dubai's Department of Finance said in an e- mailed statement today. The unsecured 5-year notes sold to the central bank pay annual interest of 4 percent.
"This program will secure the necessary funding for Dubai to meet its financial obligations and continue its development program," the statement said. The program will "substitute the liquidity that has dried up globally in the last 12 months."
Real-estate prices have fallen 25 percent in Dubai from September's peak and 20 percent in Abu Dhabi, Morgan Stanley said in a Feb. 2 report. The decline comes as a 74 percent slump in oil prices since July and scarce global credit pushed investors to dump assets in the emirate.
Dubai, home to the world's tallest building, most expensive hotel suite and largest manmade islands, borrowed $80 billion to finance its transformation into a regional financial and tourism hub. Moody's Investors Service said in October that Dubai may need help from Abu Dhabi to pay for its debt. Dubai may need to refinance $15 billion this year in maturing loans and bonds, according to the rating agency.
"This is an important signal to the markets that Dubai has the backing of the U.A.E. federal authorities and it will help Dubai sail through the rocky patch ahead," said Eckart Woertz, Dubai-based economist at the Gulf Research Center. "However, credit-default swap prices offered for Dubai Inc. companies suggest that the free market wouldn't have a comparable appetite for Dubai government bonds at the proposed pricing."
The cost to protect Dubai debt against default jumped to 976 basis points, the highest this year, on Feb. 17, according to traders of credit-default swaps.
Financial institutions worldwide have amassed $1.1 trillion of credit losses and writedowns and raised $991 billion of capital since the U.S. subprime mortgage market collapsed, data compiled by Bloomberg show. The U.S., Britain, France and Germany are among nations that have injected billions into banks to prevent a wider financial calamity.
"This mess globally is so big only governments can tackle it in my opinion because they have to restore confidence," said Sultan Ahmed bin Sulayem, chairman of the state-owned Dubai World, in Feb. 17 interview. He is also sits on a committee studying the effects of the global credit crisis on Dubai's economy.
Abu Dhabi, the largest of the U.A.E.'s seven emirates and holder of the world's largest sovereign wealth fund, said earlier this month that it will inject $4.4 billion into five of its own banks. The U.A.E. in October set up a $13.6 billion credit facility and guaranteed deposits of all local banks and some foreign lenders.
Investors have sold bonds linked to Dubai World companies on concerns that the firm may default on its financial obligations if neighboring Abu Dhabi doesn't also aid Dubai-based banks and companies.
"Why is everybody singling out Dubai?" bin Sulayem asked. "This is a federation, we are united -- we never say Arizona, or California, it is the United States."
Abu Dhabi's wealth fund had $328 billion in assets at the end of 2008, according to a study by economists at the Council on Foreign Relations.