UAE to bail out lenders, curb real estate frenzy

By John Irish and Raissa Kasolowsky

DUBAI (Reuters) - The United Arab Emirates began to bail out and consolidate Dubai's rattled banking sector and curb a building frenzy on Monday as the former boomtown started cutting state spending in the face of the global crisis.

In major policy shifts, the federal government will inject capital into Emirates Development Bank, a rescue vehicle created to absorb merging lenders Amlak AMLK.DU and Tamweel TAML.DU, while in Kuwait the country's sovereign wealth fund prepared to repatriate $3.66 billion of foreign investments.

Mohamed Alabbar, a member of the emirate's ruling council, assured investors the Gulf's regional financial hub of Dubai was able to meet its sovereign obligations as pressure from the global financial crisis mounted.

"We will see more consolidation, especially with third-party developers, who may be facing some lending difficulties," Alabbar told a conference in comments marking the first official recognition that Dubai will have to scale back its lofty ambitions.

"We are rationalizing our expenditure and consolidating our activities," he said.

Markets took the message to heart as Dubai's leading index .DFMGI plunged to its lowest level since November 2004, real estate developer Emaar Properties EMAR.DU leading the way with a 9.5 percent fall.

A state-funded bailout would be a major policy shift for the 37-year-old confederation of seven seaside emirates where the federal government has played the role of a facilitator rather than an underwriter of progress.

A cash injection would also represent the first big step by the federal government, dominated by the conservative oil-exporting emirate of Abu Dhabi, to bail out high-flying banks in neighboring Dubai.

The UAE rescue comes on the heels of European and U.S. bank bailouts, the most dramatic of which emerged earlier on Monday when U.S. authorities agreed a support package for Citigroup Inc (C.N).

Gulf woes have been compounded by the fall in oil prices, which have hovered near $50 a barrel in recent days, the level at which many Gulf exporters have budgeted their growth plans.

The UAE has resorted to drastic measures to stem the financial crisis in recent days. It placed the planned merger of Amlak and Tamweel under a little-known state-run entity called Real Estate Bank, then placing Real Estate Bank into the newly created Emirates Development Bank (EDB), which will receive federal funding and be majority-held by the federal government.

"The details are being worked out but the new entity will be supported by capital and funding," Alabbar said.

Ratings agency Moodys cautioned that matters for UAE banks will worsen as cheap liquidity has all but dried up, which will pressure lending and profits.

END OF AN ERA

In what marks the end of an era for Dubai, Alabbar said the emirate would now pare its construction ambitions back in anticipation of waning demand after spending the past five years building as much property as fast as possible.