This just in:

We have all heard about the Bank of Canada’s position on raising the overnight rate - no change until mid 2010.

Well, I was reading an economist’s take on this last week and he actually feels that the central bank will postpone rate hikes until mid 2011. He supports this position by citing a strong Canadian dollar, core inflation remaining within the target rate or below and an economy that is gradually pulling out of a recessionary period.

Yesterday I read an article in the Financial Post that quoted the venerable C.D. Howe Institute. The Howe Institute, a conservative-leaning think tank, believes that significant increases to the key overnight lending rate are required - ‘the central bank should act with zeal to get ahead of the inflation curve’. The Howe suggests that The Bank of Canada needs to aggressively raise the benchmark lending rate by 50 basis points beginning in the summer. The increases to the overnight rate should continue to increase with every scheduled announcement until mid 2011. Wow, that is aggressive! That would take the Prime lending rate from 2.25% today to somewhere in the 5.25-5.75% range in mid 2011.

There you have it, two dramatically different takes on how the Bank of Canada should contend with its monetary policy for the next twelve to sixteen months. I will reserve judgement until I read Mr. Carney’s thoughts next week.

Key Date: March 2nd, 2010 Interest Rate Announcement.

Scott H

Great rates abound in the Mortgage Marketplace and Buyingblock.com is prepared to get you the best rate:

Take advantage with a mortgage pre-approval and hold a great rate for 120 days or if you have a firm offer, speak to our mortgage experts about getting you a super low ‘Quick Close Special’ interest rate!!

Rates:

QUICK CLOSE SPECIAL

5 year fixed = 3.69%  bundle our services and get 3.64%

3 year variable = 1.85% (Prime minus 0.40% today) bundle our services and get 1.80%

PRE-APPROVAL RATES

5 year fixed rate pre-approval = 3.84%

5 year variable rate pre-approval = 1.95%

Specials abound.  Fixed rates as low as 3.69% on five year terms and variable rates as low as 1.95% or prime minus .30%.

As well, some new mortgage rules are slated to take effect April 19th as this morning Finance Minister Jim Flaherty made the following three announcements to mortgage insurance rules:

1.      Variable mortgages qualified at five year fixed rate ( previously used 3 year term );

2.      Refinancing limited to 90% instead of 95%;

3.      Non owner occupied residences require 20% down payment;

This announcement is the result of a review process on debt levels undertaken by the federal government who was fearing possible asset bubble and over heated housing market. 

Again, Mark Carney and the Bank of Canada has announced they would keep the key interest rate at a record-low 0.25 per cent to achieve its inflation target of two per cent and keep economy going.  This means prime rate is staying at 2.25%.

While the Bank said economic growth in Canada resumed in the third quarter of 2009 it has proved a little less than expected and though there has been a slightly higher than expected rate of inflation in recent months, it reiterated that the economy is still lagging, particularly due to factors like a strong Canadian dollar and low levels of U.S. demand for our manufactored goods.  

As such, prime staying at 2.25% and one of our lenders has increased the discount below prime to .30% below so that is netting out today at 1.95%.  Small drop in fixed rates as well with a 5 year term special closing within 30 days at 3.75%.

Low rates still around but for how long?  Five year fixed at 3.79% still lingering for quick close deals in next 30 days though 1/2 dozen lenders have raised rates above 4% on the popular five year fixed product.  3.89% can be held for 120 days.  Variable/adjustable rate mortgage still availalbe at 2% or prime minus .25%.  Three year term.  Prime minus .20% option for five years.

And does it make sense to consolidate that extra debt you may be carrying and add to mortgage?  See…

How your mortgage can set you free of other debt

by Michelle Warren, Bankrate.com
Wednesday, January 6, 2010provided by

 Credit crunch, debt crisis — call it what you will, but the current economic climate is spurring people to get their own finances in order. For Jack and Sarah Stewart, of Toronto, this means tackling the $40,000 in debt they’ve allowed to balloon during the past eight years. With their mortgage coming up for renewal, they’re thinking of clearing the slate and rolling the burden into their mortgage.

“We want to consolidate our debt, but we’re not sure if increasing our mortgage is the best way to do it,” says Jack, who asked that his and his wife’s names be changed to protect their privacy.

He’s not alone. Laurie Campbell, executive director of Credit Canada, says it’s a question people grapple with all the time. “Homes in the past have been your sacred cow,” she says, referring to the drive to pay down one’s mortgage as quickly as possible.

These days, however, with people juggling debts and paying varying rates of interest, increasing one’s mortgage can be a smart move, even if it takes longer to pay off.

Lowering interest rates

Peter Majthenyi, a mortgage planner with Mortgage Architects, in Toronto, says it’s a common theme as homeowners strive to bring down the overall interest they pay, as well as reduce their monthly obligations. He prefers to think of it as repositioning one’s debt, and in his experience, “in almost all cases, it’s justified.”

“If you have debt that is sitting at 18 percent interest, then it certainly makes sense,” says Campbell, adding that it’s something to consider only if you have enough equity in your home and if your mortgage is coming up for renewal (read the fine print to find out if the penalties for breaking a mortgage outweigh the possible benefits).

Majthenyi notes that if you’re working with the same lender, there’s often no penalty involved with increasing your mortgage before the term expires.

The Stewarts seem like prime candidates. They have a $200,000 mortgage on a house worth about $425,000. They have plenty of equity, they’re up for renewal at the end of the year and they say they’re serious about getting their finances in order. Ideally, they’d roll the debt into their mortgage, continue an accelerated payment program whereby they pay every two weeks and they would not increase their amortization period, but instead increase their payments.

Dealing with debt

It’s a good plan, says Campbell, who thinks all mortgage holders should accelerate their payments. She also likes the idea that they plan to stick to a 17-year amortization instead of renegotiating another 25-year mortgage. However, she stresses that none of this amounts to much if the Stewarts are going to continue the same spending habits and find themselves in a similar position five years from now. “They have to understand what got them into this $40,000 debt in the first place. They have to make sure they don’t fall victim to that again.”

She recommends cutting up credit cards, especially store cards, which have higher rates of interest, and not using one’s line of credit like a bank account.

The Stewarts say the bulk of their debt was incurred for renovation costs, including a new kitchen and installing hardwood flooring, but admit their spending habits need a makeover. “We’re always dipping in to our line of credit because we’re strapped for cash,” says Sarah Stewart. “I think if we consolidate the debt, it’ll increase our cash flow and we’ll be able to live within our means.”

Jeanette Brox, a Certified Financial Planner with Investors Group in North York, Ont., always encourages her clients to look at the big picture when it comes to financial health: “My job is to make them think outside the box.” She says helping people manage debt, while securing their future, is essential. “People need to think beyond what our parents did, which was paying down the mortgage,” she says. “I used to think that way too, but I don’t anymore.”

In her view, the Stewarts and others like them need to take an aggressive approach if they ever want to get ahead. Not only do they need to improve cash flow, but they also need an emergency fund for unforeseen expenses, not to mention a retirement plan.

Planning for the future

Brox admits a lot of people would balk at the idea, but she thinks the Stewarts, both in their early 30s, should not only roll their debt into the mortgage, but increase their mortgage an additional $35,000 for a total of $275,000. To make payments more manageable, she’d also recommend increasing the amortization period to 25 years. She would invest $25,000 in mutual funds and further $10,000 in a money market account (earning about two percent interest).

“This is what I call a lifestyle fund,” says Brox, adding that part of the interest cost on the mortgage would be tax deductible. “It’s a win-win situation, but you’ve got to be really disciplined.”

That means using their increased tax return to pay down the principal on the mortgage, thereby helping compensate for the interest cost of carrying the additional $35,000. The other bonus is that within five years (or so), the $25,000 registered retirement savings plan, or RRSP, will have grown to about $40,000. She stresses this is a long-term plan and people have to realize that the market is going to rise and fall.

“It’s all based on comfort level,” says Brox, adding that the biggest mistake she sees with people who reposition debt is that they don’t have a long-term plan and, as Campbell, pointed out, go back to old spending habits. “People need to have their whole financial picture analyzed. It’s something to consider, but you need to work with a planner or bank manager.”

Lines of credit

There’s a whole school of thinkers that shudder at the thought of increasing one’s mortgage. At the core of this is that you’re trading unsecured debt for secured debt and paying interest on that debt for the entire life of your mortgage, which can dramatically increase the cost of borrowing. In addition, refinancing also involves added legal costs (in most cases a minimum of $500). An alternative is consolidating debt onto a line of credit or home equity loan, which have higher interest rates than a mortgage, but can be paid off more quickly.

This works in theory, say our experts, but rarely in real life. “A lot of people just make the minimum payment and never get it cleaned up,” says Brox.

“I’m wary of open lines of credit because they can easily stay at $50,000 forever,” says Campbell, adding that an increased mortgage payment forces people to be more disciplined in paying down debt.

As for paying the debt for the entire length of your mortgage, all the experts stress that the way to combat this is by channelling extra funds back into the mortgage and paying off the mortgage early. This could mean accelerated payments, using tax returns or bumping up the payments. “We’re putting all the money back into the principal of the mortgage,” says Majthenyi, who points out that an extra $10,000 on a mortgage costs about $50 a month, while a $10,000 loan requires minimum payments of $300.

In the Stewart’s case, it’s costing them about $1,000 a month to cover $40,000 debt. If it’s part of their mortgage, it translates into about $200. Ideally they’d direct the bulk of that money back into their mortgage through an annual lump payment or by increasing individual payments by a few hundred dollars.

Repositioning debt into one’s mortgage is a sound option for people who are committed to changing bad habits and/or taking a long-term approach to getting their finances in order.

When it comes to money, Brox says that people need a big-picture plan, not a band-aid solution: “A lot of times it’s not what you make but how you manage it.”

Good chance fixed rates could be climbing.  Current low is 3.79% with 30 day rate hold or 3.99% for 120 days.  Note some lenders already up in mid 4% range.  Variable still in 2% or 2+% range depending on lender.  Job numbers being released today will influence the bond yields and in turn likley affect fixed rates.  Get preapproved asap if interested in a fixed rate mortgage this winter! 

David Paddon, THE CANADIAN PRESS
TORONTO - Canada’s residential real estate market is expected to remain unusually strong through the first half of this year after a strong finish to 2009, according to a survey published Thursday by Royal LePage.

The Royal LePage analysis is consistent with other recent reports on the state of the Canadian real estate market, which has rebounded over the past 12 months after sales dried up in late 2008 and hit a multi-year low in January 2009.

The Canadian market’s sudden plunge was sparked by a credit crunch that originated in the U.S. housing and lending industries - eventually spreading globally, causing a worldwide recession in the late summer and early fall of 2009.

However, the Canadian real estate market has been much quicker to recover than its American counterpart, in part because of a more stable banking industry, historically low interest rates and improving consumer confidence.

Royal LePage executive Phil Soper says Canada’s real estate market enters 2010 with “considerable momentum from an unusually strong finish to the previous year.”

The stimulus effect of low borrowing costs has contributed to a sharp rise in demand that has driven activity to new highs, he said in a statement.

Royal LePage says house prices appreciated in late 2009, with fourth-quarter price averages higher than in the fourth quarter of 2008.

The average price of detached bungalows rose to $315,055 (up six per cent), the price of a standard two-storey home rose to $353,026 (up 5.2 per cent), and the price of a standard condominium rose to $205,756 (up 6.4 per cent).

Regions that saw the strongest declines during the recession are now showing marked gains. Those regions include Toronto and the Lower Mainland, B.C.

Vancouver, which is frequently Canada’s most expensive real estate market, experienced a particularly robust quarter, with home prices rising across all housing types surveyed.

“No other sector of the economy has been as highly affected by economic stimulus as housing,” said Soper.

“As consumer confidence has improved, Canadians have shown a lingering reluctance to acquire depreciating assets such as consumer durables, but have embraced the opportunity to invest in real property.”

Royal LePage estimates that Vancouver’s real estate prices will rise a further 7.2 per cent this year, although February may be soft because of the Olympic Winter Games that will be held in the city and nearby Whistler, B.C.

Detached bungalows in Vancouver sold for an average of $828,750 in the fourth quarter, up 11.4 per cent from the same period last year. Standard condominiums in Vancouver went up 11.8 per cent year-over-year to an average of $452,750. Prices of standard two-storey homes in Vancouver rose 9.6 per cent year-over-year, selling at $917,500.

In Toronto, the average price of a standard condo rose 2.9 per cent to $309,316, detached bungalows rose 9.9 per cent to $446,214 and standard detached homes increased 3.5 per cent to $564,175.

In Montreal, the average price of a detached bungalow rose to $245,125 (up 3.1 per cent; a condo increased to $216,667 (up 16 per cent) and a two-storey house increased 12.3 per cent from a year earlier to $345,789, Royal LePage said.

The Greater Montreal Real Estate Board reported Thursday that the number of sales last year increased 41,802, up three per cent from 2008. The median price of a single-family home was $235,000 last year, up four per cent from 2008.

“Although sales decreased the first four months of 2009, Montreal’s real estate market rebounded and finished the year on a positive note,” said Michel Beausejour, the Montreal board’s chief executive.

The group that represents Toronto-area realtors reported Wednesday that there were 87,308 transactions last year through the Multiple Listing Service, a 17 per cent increase over 2008.

In December, there were 5,541 sales in the Greater Toronto Area (average price $411,931), up from 2,577 sales in December 2008 (average price $361,415), according to the Toronto Real Estate Board.

The Toronto board also said the number of sales of existing homes rebounded in the latter half of 2009 after a slow start at the beginning of last year.

Royal LePage’s average price estimates for other Canadian cities include:

-St. John’s, N.L.: Detached bungalow, $217,167 (up 14.3 per cent); standard two-storey house $298,833 (up 14.1 per cent).

-Halifax: Detached bungalow, $238,000 (up 10.7 per cent); standard two-storey homes, $265,333 (up 1.8 per cent).

-Charlottetown: Detached bungalow, $160,000 (up 1.9 per cent); standard two-storey $195,000 (up 3.7 per cent).

-Saint John, N.B.: Detached bungalow, $228,000 (up 1.3 per cent); standard two-storey $299,000 (up 1.5 per cent).

-Moncton, N.B.: Detached bungalow, $152,300 in the fourth quarter (up 1.5 per cent); standard two-storey home, $131,000 (up 4.0 per cent)

-Fredericton: Detached bungalow, $182,000 (up 12.3 per cent); standard two-storey, $210,000 (unchanged).

-Ottawa: Detached bungalow, $332,417 (up 3.4 per cent); standard two-story home $331,917 (up 3.7 per cent).

-Winnipeg: Detached bungalow, $241,650 (up 9.9 per cent); standard two-storey home $275,500 (up 10 per cent).

-Edmonton: Detached bungalow, $299,286 (down 0.7 per cent); standard two-storey home, $340,557 (down 1.2 per cent)

-Calgary: Detached bungalow, $412,478 (up 0.5 per cent); standard two-storey home, $427,067 (up 2.3 per cent).

Happy New Year?  Perhaps not as two smaller lenders today raised the 5 year fixed rate almost a 1/2 point from 4% range to 4.44%.  Will others follow?  Likely.  Bond market has heated up in December.  If debating locking in now may be the time to consider since many lenders still a fraction below 4%. 

Still no talk of prime rate jumping as high Canadian dollar and tepid economic news as kept Bank of Canada suggesting no changes until at least mid 2010.   So variable as low as 2%.  Best five year fixed rate on market at 3.79% with limited prepayment options or 3.89% with regular options. 

Interest rates continue to trickle down.  Variable rate as low as 2% now, or prime minus .25%, and new 30 day quick close special on the 5 year fixed rate at 3.79%.

Some conditions apply. 

                                   ·          TSX +121.76  

                                   ·          DOW +29.55

                                   ·           Dollar +.05c to 94.40cUS  

                                   ·            Oil  -$.36 to $69.51US per barrel.  

                                   ·           Gold +$3.90 to $1,123.40USD per ounce  

Canadian 5 yr bond yields +.02 bps to 2.56.

No change in prime rate.  Staying put at 2.25%.  So can still borrow money with mortgage at 2%!

Economic recovery is ’solidly entrenched’: BoC

Paul Vieira, Financial Post 

OTTAWA — After months of uncertainty, the economic recovery now appears to be “solidly entrenched,” the Bank of Canada said Tuesday, indicating its forecast for growth should unfold as envisaged.

Still, in its latest interest rate announcement, the central bank reiterated, as expected, its conditional commitment to keep its key policy rate at a record low 0.25% until June 2010 as inflation is still not expected to hit its preferred 2% target until the second half of 2011.

Recent data – from retail sales to a stunningly strong jobs report for November — have painted a mostly cheer picture of the Canadian economy, analysts say, even though third-quarter GDP growth of 0.4% annualized came in well below the central bank’s 2% expectation.

Since the central bank’s latest economic forecast in October, “global economic developments have been slightly more positive and the global outlook has improved modestly,” the bank’s governing council said in its statement, adding though that “significant fragilities” remain.

The central bank said the composition of economic growth is unfolding as expected, highlighted by a shift toward stronger domestic demand and less reliance on exports.

“The main drivers and the profile of the projected recovery in Canada remain consistent with the bank’s [outlook],” it added. “The bank continues to expect economic growth to become more solidly entrenched over the projection period and inflation to return to the 2% target in the second half of 2011.”

According to the central bank’s outlook, Canada is expected to grow 3.3% this quarter, followed by expansion of 3% next year and 3.3% in 2011. Predictions for strong growth gained steam late last week when data indicated the Canadian economy added 79,000 jobs in November.

Further, the central bank on Tuesday played down the impact of the stronger dollar, even though it acknowledged it remained a key risk to its forecast, and “could act as a significant further drag” on growth and inflation. The stronger loonie, which has advanced as much as 25% this year against its U.S. counterpart, led to a surge in imports in the third quarter – resulting in net exports acting as a drag on the economy of roughly 5.3 percentage points.

Since the last rate announcement, however, the dollar has on average traded a couple of cents below the central bank’s working assumption of a US96¢ loonie.

Most analysts were looking for any change in nuance in the bank’s statement – in particular a hint or two that it might move before its conditional pledge to keep rates at a record low until June 2010 given the surge in domestic consumption as households take advantage of record low borrowing costs.

Instead, the central bank reiterated that its target rate of 0.25% “can be expected” to remain intact until the end of the second quarter of next year. The pledge is conditional on inflation hitting the 2% target in the third quarter of 2011, as the bank expects.

The last time the bank raised its key policy rate, to 4.5%, was in July of 2007 – and shortly afterward the first signs of the credit crisis emerged.

Some economists, such as Ryan Brecht of Action Economics, expect the central bank to begin hiking its policy rate, and aggressively, starting in the second half of next year.

In a note released Tuesday morning, Mr. Brecht, the firm’s senior North American economist, said he envisaged the Bank of Canada raising its target rate by 175 basis points before December of 2010, for a policy rate of 2%, or “more normal levels.” Still, that would be below the 3% level in September of 2008, when Lehman Bros. collapsed, or the 4.5% peak hit more than two years ago.

Financial Post

More lenders lowering rates to below prime on the variable, meaning today rates south of 2.25%.  And popular five year fixed rates have additional lenders just over 4%.  Special rates with 30 day quick closing options below 4%. 

Troubles in financial markets as Dubai hits credit snag.  See below. 

                                   ·          TSX +27.61 TSX ended higher on Friday but stock markets were mostly bruised last week in the wake of news that the Dubai government’s investment company Dubai World wants a standstill in payments on its approximately US$60 billion in debt until at least May

                                   ·          DOW -154.48

                                   ·           Dollar -.09c to 94.21cUS    

                                   ·            Oil  -$1.91 to $76.05US per barrel.  

                                   ·           Gold -$12.80 to $1,174.20USD per ounce

Canadian 5 yr bond yields unchanged: remains at  2.36.

Dubai’s reputation as investment magnet takes hit amid ‘standstill’ on $60B debt

The Associated Press

DUBAI, UNITED ARAB EMIRATES — Just a year after the global downturn derailed Dubai’s explosive growth, the city is now so swamped in debt that it’s asking for a six-month reprieve on paying its bills — causing a drop on world markets today and raising questions about Dubai’s reputation as a magnet for international investment.

The fallout came swiftly and was felt globally after Wednesday’s statement that Dubai’s main development engine, Dubai World, would ask creditors for a “standstill” on paying back its $60 billion US debt until at least May.

The company’s real estate arm, Nakheel — whose projects include the palm-shaped island in the Gulf — shoulders the bulk of money due to banks, investment houses and outside development contractors.

In total, the state-backed networks nicknamed Dubai Inc. are $80 billion in the red and the emirate needed a bailout earlier this year from its oil-rich neighbour Abu Dhabi, the capital of the United Arab Emirates.

Markets took the news badly — with the Dubai woes and the continued fall of the U.S. dollar giving investors twin worries. Dubai’s move raised concerns about debt across the Gulf Region. Prices to insure debt from Abu Dhabi, Qatar, Saudi Arabia and Bahrain all rose by double-digit percentages Thursday, according to data from CMA DataVision.

 “Dubai’s standstill announcement … was vague and it remains difficult to discern whether the call for a standstill will be voluntary,” said a statement from the Eurasia Group, a Washington-based research group that assesses political and financial risk for foreign investors interested in Dubai.

“If it is not, Dubai World will be going into default and that will have more serious negative repercussions for Dubai’s sovereign debt, Dubai World and market confidence in the UAE in general,” the statement added.

Dubai became the Gulf’s biggest credit crunch victim a year ago. But its ruler, Sheik Mohammed bin Rashid Al-Maktoum, had continually dismissed concerns over the city-state’s liquidity and claims it overreached during the good times.

When asked about the debt, he confidently assured reporters in a rare meeting two months ago that “we are all right” and “we are not worried,” leaving details of a recovery plan — if such a plan exists — to everyone’s guess.

Then, earlier this month, he told Dubai’s critics to “shut up.”

“He needs to produce a recovery plan that will be respected by those who want to do business with Dubai,” said Simon Henderson, a Gulf and energy specialist at the Washington Institute for Near East Policy. “If he does not do it right, Dubai will be a sad place.”

After months of denial that the economic downturn even touched the glitzy city-state, the Dubai government earlier this year showed signs of trying to deal with the financial fallout that has halted dozens of projects and touched off an exodus of expatriate workers.

In February, it raised $10 billion in a hastily arranged bond sale to the United Arab Emirates central bank, which is based in Abu Dhabi. The deal — seen by many as Abu Dhabi’s bailout of Dubai — was part of a $20-billion bond program to help Dubai meet its debt obligations.

On Wednesday, the Dubai Finance Department announced the emirate raised another $5 billion by selling bonds — all taken by two banks controlled by Abu Dhabi.

Abu Dhabi’s ruling Al Nahyan family has been more conservative with its spending, investing oil profits into infrastructure, culture and state institutions. During Dubai’s real estate bonanza, the Nahyans saw their flashy neighbour race ahead with development plans and tourism plans that had plenty of hype but few details on how they would be pulled off.

Some did materialize. The more than 800-metre Burj Dubai is scheduled to open in January as the world’s tallest building. But many other projects, including a tower even taller than the Burj Dubai and satellite cities in the desert, are still just blueprints.

The standstill will likely not immediately affect CityCentre, an $8.5-billion casino complex opening next month in Las Vegas that is half-owned by Dubai World. A Dubai World subsidiary and casino operator MGM Mirage agreed with banks in April to fully fund and finish the six-tower, 27-hectare development of plush resorts, condominiums, a retail mall and one casino on the Las Vegas Strip.

However, the standstill’s effect may be felt on the famous Keeneland thoroughbred horse auctions near Lexington, Ky., where Sheik Mohammed is a prominent bidder.

Last week, Sheik Mohammed demoted several prominent members of Dubai’s corporate elite and replaced them with members of the ruling family, including his two sons, one of whom is Mohammed’s designated heir.

Businessmen who fell out of favour were closely associated with Dubai’s phenomenal success. They include the head of Dubai World, Sultan Ahmed bin Sulayem, and Mohammed Alabbar, the chief of Emaar Properties, developer of the Burj Dubai and hundreds of other projects.

“He is trying to shake things up,” said Christopher Davidson, a lecturer on the Gulf at Britain’s Durham University and an author of two books on the UAE.

However, Davidson added, Mohammed’s decision to replace those who helped put Dubai on the world map with his relatives might be “read as an increase in autocracy which does not look good internationally.”

Not everyone is upset at Dubai Inc.’s transformation into a family business, analysts say.

Mohammed’s latest moves may have pleased Abu Dhabi more than the foreign investors, but it is Abu Dhabi that still has the strongest incentives to save Dubai from its financial misery.

“By shifting the power base back to the family things are as they should be as far as Abu Dhabi is concerned,” said Mohammed Shakeel, a Dubai-based analyst for the Economist Intelligence Unit.

After an expensive adventure in doing things the Western way, it’s “going back to basics” for Dubai, Shakeel added.

UAE central bank to bolster Dubai banksmess

By Barbara Surk and Tarek El-Tablawy

DUBAI, UNITED ARAB EMIRATES — The United Arab Emirates’ central bank said Sunday it would offer additional liquidity to banks, signalling a push by the federal government to reassure investors worried about the country’s banking sector and its exposure to Dubai’s crushing debt.

Global equity markets were set to reopen today, and investors are worried about a routing similar to that seen last week after Dubai’s chief engine for growth, Dubai World, announced it wanted more time to pay some of its roughly $60 billion US in debts.

The UAE’s official WAM news agency said the central bank issued a notice to banks saying it would make available “a special additional liquidity facility linked to their current accounts at the central bank.” The statement said the facility can be drawn upon at a rate of 50 basis points — half a per cent — above the three-month Emirates interbank offered rate.

International investors reacted with shock and outrage at Dubai World’s announcement Wednesday that, as part of its restructuring effort, it would ask creditors to delay repayment of its debt and that of its real estate arm, Nakheel, until at least May. Nakheel has a $3.5 billion bond coming due in December.

The company’s roughly $60 billion in debt makes up the brunt of the at least $80 billion Dubai owes as a result of a meteoric decade-long growth boom that saw the tiny city-state transformed into a Middle Eastern Las Vegas, New York and Los Angeles all wrapped into one. Dubai World was a key driver of that growth, with interests ranging from ports to real estate.

In the days since the announcement, Dubai officials have gone to neighbouring Abu Dhabi, the oil-rich home to the federal government for a series of meetings. Some analysts have speculated that the timing of Dubai World’s announcement — on the eve of a three-day Islamic holiday — caught even Abu Dhabi’s rulers by surprise, putting them under pressure to act decisively in a bid to shore up confidence in the country’s banks.

UAE banks are believed to be shouldering a large chunk of Dubai’s debts, and international ratings agencies have either downgraded the ratings of some of the country’s banks — or at least placed them on review for further downgrades — citing exposure to Dubai World’s debt.

The central bank’s statement was also aimed at mitigating any negative fallout on the country as a whole, with concerns that Abu Dhabi would be branded with the same iron of pessimism and skepticism that Dubai will likely endure for years to come.

The UAE’s banking system is “more sound and liquid than a year ago,” the bank said.

Dubai World’s call for more time is seen by many analysts as a classic case of over-extension — a tale of a city-state whose dreams for development propelled it to stardom with its indoor ski-slopes, man-made islands and world’s tallest tower.

But that dream was built on borrowed time and money, and as the global recession hammered Dubai, driving property prices down by 50 per cent in a year, forcing layoffs and project delays and cancellations, the emirate no longer had access to the easy credit on which it had pinned its growth.

It simply couldn’t pay.

At the beginning of the year, it launched a $20-billion bond program, of which $10 billion was snapped up by the UAE’s central bank. The same day Dubai World issued its murky statement about a debt-extension, the emirate’s government said a new $5-billion bond issuance had been bought up by two banks majority owned by Abu Dhabi.

While the Dubai World statement made clear that the bonds were not linked to its debt woes, it was obvious that the emirate had little recourse but to turn to Abu Dhabi, whose more conservative growth was fuelled by the same oil that Dubai lacks.

Dubai’s debt saga is not new.

It’s been obvious for some time that the emirate owes more money than it can repay. But what remained unclear was the overall extent of the debt load and what officials were doing to avert a panic at a time when the world was in the nascent stages of emerging from its worst recession in over six decades.

UAE newspaper Al-Itihad on Sunday quoted an unidentified Dubai World official as saying the conglomerate, over the past few months, “totally rejected the idea of selling some of its good investment and real estate assets at low prices.”

The official said any asset sale needed to be in a “commercially fair manner in order to achieve (Dubai World’s) long-term strategic objectives, away from … economic pressures.”

The Associated Press