The United Arab Emirates' central Bank has set up an emergency facility to support bank liquidity. This is in the first policy response to Dubai's debt troubles, that are threatening to paralyze lending and derail the economic recovery.

News of Dubai's request for a delay in debt repayments rocked the financial world, Wednesday. The debt-laden financial hub, said it would ask creditors of "Dubai World", the emirate's financial investment arm, and Nakheel, the builder of its palm-shaped islands, to agree to a freeze on billions of dollars of debt. They are hoping this will be the first step towards restructuring. Banks could face heavy losses and the risk that fearful depositors could rush to remove cash from the system.

Analysts, say such moves could threaten interbank lending with the second largest Arab economy that is still facing a downturn this year.

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