While the central bank governor Sultan Bin Nasser Al Suwaidi said last year that liquidity noticeable eased by April of 2009, the effects had persisted. Construction companies and consulting firms were not the only ones hurt. According to a principal at consultancy Booz & Co., Daniel Diemers, private banking and wealth management saw the dramatic effects of the liquidity crunch peak from September 2008 to May of 2009.

“The average client of the Middle East in the U.A.E. was someone who had a lot of family wealth, yes, but that wealth was largely tied up in family businesses that needed capital,” he says. “If you own a family business you can literally take cash from the business to [to make investments]. Of course, you can indirectly leverage.” Families with enormous wealth are under pressure to create and sustain the lifestyles of large families with dependents and to maintain viable businesses. Many families, like their banks, werehighly leveraged and were reluctant or found it difficult to sell their investments when prices dropped. “Some people have very nice investments, like the $30 million villa, but this is not a commodity,” Diemers says. “You cannot just throw it on [the Web site] Dubizzle, it is so customized and bespoke.”

But Diemers says that private banks in the U.A.E. and Middle East were less affected than those in developed markets. And many in banking have acknowledged the advantages of the Nakheel restructuring. “Although the recovery of the property sector is likely to take some time, we expect a timid recovery in construction, albeit from a low base,” the Japanese bank Nomura wrote in a recent report. “The Dubai World restructuring, which will settle many outstanding liabilities to contractors (even if for less than total amounts due) should help revive activity in the sector since many construction projects have been stalled by a lack of liquidity.”

The restructuring of one company, though, does not resolve the problem. In October 2008, the federal government said it would guarantee depositsin all U.A.E. banks for the next three years. Gulf-wide, governments have spoken openly about introducing new regulations such as increased loan to deposit ratios, something that will affect the private banks as well as retail and commercial banks. “Any liquidity rule on the banks with deposit ratios of x amount, this clearly will affect the private banks,” Diemers says. “They will fall under the liquidity regimes.”

The U.A.E.’s central bank is a net saver, and sources say that it has significant resources to draw on if banks demonstrate that they need the loans. But the lack of liquidity can only be resolved permanently if the banks are open about their losses.

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