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Kuwait to guarantee loans in $5bn aid package

Kuwait City, February 8, 2009

Kuwait will guarantee 50 percent of fresh loans banks provide to local firms as part of a $5 billion rescue plan to soften the impact of a global credit crunch, the central bank governor said on Sunday.

Sheikh Salem Abdul-Aziz Al-Sabah also said the current level of the discount rate was appropriate after having cut the key rate several times to help stimulate the economy of the country.

On Thursday, the government approved a new stimulus package worth 1.5 billion dinars ($5 billion), which needs parliamentary approval, to tackle a global crisis hitting the Opec producer despite its enormous oil wealth.

Kuwaiti banks were expected to give fresh loans worth a maximum 4 billion dinars ($6.8 billion) within two years across economic sectors, of which the government would guarantee up to 50 percent to encourage lending, Sheikh Salem said.

"This move will support the state's fiscal and investment policy and will have a positive impact on the private sector," he told reporters.

The rescue plan would also guarantee fresh loans given to investment firms which have been struggling to replace debt with banks reluctant to lend, Sheikh Salem said.

Global Investment House, Kuwait's biggest investment bank, said last month it had defaulted on most of its debt, while Islamic rival Investment Dar said in December it needed up to $1 billion in loans.

Kuwait will guarantee half of all loans local banks would provide to investment firms to reschedule debt and 25 percent of those from foreign creditors, Sheikh Salem said, putting the total debt of local investment firms at 5 billion dinars.

Any help would be limited by the bill's total value of 1.5 billion dinars. "This will cover everything. The amount mentioned in the law...includes everything, any issues mentioned in this law whether guarantees or deficit...are included in the 1.5 billion dinars," he said.

Other measures allow the Kuwait Investment Authority (KIA), which manages the country's oil-generated assets, to help banks unable to raise fresh capital, the bill said. This could be done by buying banks' preferred shares in capital increases, acquiring convertible bonds or any Islamic finance instruments.

Last year, Kuwait rescued its fourth-largest lender Gulf Bank with KIA buying 16 percent unsubscribed stock in an emergency rights issue.

The state can issue conventional or Islamic bonds to back up the guarantees and investment firms' assets will be used as collateral for any fresh loans, according to the bill.

Sheikh Salem said the discount rate used to set lending rates was appropriate at 3.75 percent following several cuts.

"Until this moment, the rate is suitable. If there was a need to move it up or down, we will, but in this stage, it is suitable," he said.

Parliament is expected to discuss the bill from Tuesday amid calls by several lawmakers to link approval to demands to buy up also debt of citizens, a move the government has rejected. - Reuters




Tags: Kuwait | aid package |

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