The United Arab Emirates' central bank said Sunday it has notified domestic and foreign banks with branches in the country that they would have access to "a special additional liquidity facility."
The offer comes after Dubai World, the conglomerate that has long been the chief engine behind Dubai's explosive growth, announced Wednesday it needed at least a six-month reprieve from paying its nearly $60-billion US debt. The news sent global markets tumbling.
Mideast markets were unaffected because of an extended Islamic holiday, but they reopen Monday.
"There is concern," said John Sfakianakis, chief economist at the Riyadh, Saudi Arabia-based Banque Saudi Fransi-Credit Agricole Group. "They're trying to take preventive measures in order to lower the risk of a run on the local banks."
"Depositors could very well panic … and they could decide to take their money out of the banking system," he added.
The UAE has been guaranteeing bank deposits since October 2008, but the pledge for new help at generous terms stems from concern that UAE banks have some of the biggest exposure to Dubai World's debt. Several have been downgraded by international ratings agencies or been placed on review for downgrades.
The move also comes as Dubai officials, who have sought to play down the semiautonomous emirate's financial woes in the wake of the world's worst recession in over six decades, are shuttling to and from Abu Dhabi, the oil-rich home to the UAE's federal government.
Ostensibly, the discussions, which have not been made public, are about how to move forward after a year that saw Dubai's economy plummet.
Real estate prices in the emirate have fallen by 50 per cent over the past year. Many of the multibillion-dollar projects for which Dubai became famous were either scrapped or delayed, and people started losing their jobs.
As the global credit crunch hit last year, it dried up the cheap cash on which Dubai — the Middle East's version of Las Vegas, Disneyland and Wall Street — had built its fortunes.
The Dubai and Abu Dhabi stock markets are likely to take a routing on Monday, analysts said. Dubai's could be particularly hard hit. Elsewhere in the region, the bourse in Saudi Arabia, the Arab world's largest economy, will be spared for a few more days because of the holiday there.
The lingering uncertainty about how Dubai officials will deal with this crisis is another sore point.
A top Dubai official on Thursday said more details about the company's plans would be announced in the coming days. But a lack of transparency is endemic both in Dubai and throughout the Gulf.
One option is a fire sale of the conglomerate's assets, though that seems less likely.
The most probable scenario, according to analysts, is that Abu Dhabi will step in with a bailout, perhaps cherry-picking the strongest assets to support.
There is precedent for this, with the central bank having bought up the first half of a $20-billion bond program launched by Dubai earlier this year. And, on the day Dubai World announced it needed a debt reprieve, the emirate's government announced that two banks, majority-owned by Abu Dhabi, had each decided to buy up a $5-billion bond issue from Dubai. Dubai World pointed out, however, that the money was not earmarked to pay its debt.
That only served to fuel speculation about what the federal government and Dubai would do.
"Abu Dhabi needs to send clear signals because the Dubai World debt mess is not just Dubai's problem, but a UAE problem," said Eckart Woertz, program manager for economics at the Gulf Research Center in Dubai.