But it is still barely sufficient.
The United Arab Emirates offered banks emergency support (special liqudity facility rate of 0.5% above Emirates interbank rates) Sunday, the first steps to ease fears that a looming debt default by two of Dubai's flagship firms could derail the global economic recovery.
"We will look at Dubai's commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts," the official in the government of the adjoining emirate of Abu Dhabi told Reuters by phone.
Okay, as we can see both the UAE and Abu Dhabi has offered to help.
However, let's be clear about this, UAE is not going to pay everything which is to say every single bit of the $80 billion debt for Dubai, it is merely going to inject liquditiy into the banks that needs help to cope with the debt default which is going to be delayed by 6 months.
At the same time, this move will cause many banks to go into a frenzy where they try to sell off any assets as fast as possible to raise enough money to help them tide over this 6 months.
Liqudity refers to the rate at which the bank can sell off its assets. I surmise that the UAE will most probably facilitate their selling of stocks, bonds, along with their assets. However, that is not going to sufficient because banks are weak now and they are going to be weaker.
Why is that so?
Because, once the market open, every cynical citizen is going to sell off their stocks, bonds, and investments and they are going to invest in commodities like oil and gold because they are way safer in terms of the margin of safety.
At this point, banks will go into another crisis and I assume that a lot more banks are going to go bankrupt unless UAE is willing to save all of them.
How about the other option? Abu Dhabi.
Yes, it has more than enough assets to help Dubai, considering it has a total assets of more than 300 billion dollars.
The bad news is, Abu Dhabi is going to help Dubai SELECTIVELY which is to say, there will be contracts and stuff. I don't blame Abu Dhabi for that considering that this is the best chance to exploit Dubai's unfortunate crisis.
Furthermore, it is going to be precarious move for Abu Dhabi as well. No doubt it is rich, but there still has to be a limit to the loaning of funds to other countries. You wouldn't want to lend out money and get into a crisis yourself. Ultimately, it boils down to saving yourself first.
Well, all in all, I'm sure you all can tell that even though it's going to be harsh on Dubai, the problem will eventually be solved, though at an extremely high cost.
Last but not least, during this period, it is imperative that we sell whatever we have because there will be another mini-financial crisis created by the people around the world. The government is most probably busy painting a beautiful facade to hide all these ugliness. Don't be tricked by the veneer of alacrity!
Credits -cnn, -omarulhaq, -rawartint, -emiratesupdate, -billionairescapital
No comments:
Post a Comment