There are signs in the UAE that concerns over the stability of federation's banks and businesses are causing a flight from letter of credit (L/C) business.

Dubai's near default on what had been assumed to be quasi-sovereign debt of around US$4 billion has raised fears over UAE-based counterparty risks amongst international bankers and traders.

No to L/Cs

According the manager of Dubai-based metals analysts, MESteel, sellers from China are no longer prepared to accept L/Cs as deferred payments.

"Until recently, traders were accepting L/Cs for deferred payments. The system has changed and new practices are being developed," Karel Costenoble told local media.

Background

On 25 November, the Dubai authorities issued a statement essentially saying that a government owned Dubai World subsidiary, Nakheel, would not be repaying an Islamic bond equivalent due on 14 December and the neighbouring emirate of Abu Dhabi would not bail out the ailing property developer.

World markets had assumed that the neighbouring emirate of Abu Dhabi would bail out Nakheel; thus, they viewed the prospect of non-payment as a sovereign default.

Abu Dhabi at the last minute changed its mind and repayment of the US$4.1 billion Nakheel sukuk is now underway. However, confidence in the UAE's banking system has not yet been restored.

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