(Adds quotes, analyst, Dubai CDS, Fitch comments, context)
By Daliah Merzaban
DUBAI, Feb 25 (Reuters) - Dubai said on Wednesday $10 billion in bond proceeds from the United Arab Emirates central bank would be enough for now to help state-linked firms settle debts and restructure to tackle an economic downturn.
The former Gulf boom town would give loans on a case-by-case basis to wholly or partly state-owned companies looking to repay debts maturing this year as well as to meet other commitments, said Nasser al-Shaikh, director-general of Dubai's Department of Finance.
Real estate companies in Dubai, where the property sector has crashed after a six-year boom, would be among the main beneficiaries of state aid, he said, declining to say how much debt Dubai firms would repay in 2009.
"We understand that some entities might face difficulties in refinancing because of the global credit crisis," he told a media briefing in Dubai, part of the seven-member United Arab Emirates federation, the world's fifth-largest oil exporter.
"By protecting the major players in our economy, automatically we are protecting our economy," he said.
The Gulf Arab trade and tourism hub is ready to issue a second $10 billion tranche when needed and was considering a stimulus package for small and medium enterprises, the details of which could be unveiled within three weeks, Shaikh said.
Markets had worried for much of this month that Dubai, which borrowed heavily to support expansion during a regional economic boom fuelled by high oil prices, could be left to default on some $15-20 billion in debt due for refinancing this year.
Concerns that Abu Dhabi, holder of more than 90 percent of the UAE's oil reserves, might not help Dubai have led credit default swaps (CDS) for insuring the debt of some Dubai entities to rise to levels exceeding those of crisis-hit Iceland this month.
"I'm looking for the funds to be used defensively, to insulate Dubai from the worst effects of the global credit squeeze," said Simon Williams, regional economist at HSBC.
FEDERAL BACKING
CDS on Dubai sovereign debt, which dropped about 200 basis points (bps) after the bond issue news, fell another 20 bps on Wednesday to 705 bps, according to Standard Chartered data. Abu Dhabi is the main contributor to the UAE federal budget.
"Many foreign observers continue to mistakenly see the UAE as distinct from Dubai," Shaikh said, adding the bonds -- which are not backed by assets and are secured by Dubai -- sent a "clear message" that the federation would stand by the emirate.
But the loans are not without conditions. Dubai has already scaled back a dramatic expansion plan that saw it step onto the world stage by building the world's tallest tower, as well as islands shaped as palm fronds and the world map.
Hundreds of billions of dollars of projects have been put on hold or cancelled and Dubai faces a budget deficit this year.
"We will have our conditions ... we cannot forget this money is borrowed at a sovereign level," Shaikh said.
Companies tapping the support fund would have to pay back the loans at a price at least equal to the 4 percent Dubai is paying on the bonds, and repay the loans once the financial climate improves, he said.
The mechanism was still being worked out but cash could be lent directly to firms or through banks, Shaikh said, adding that using the entire $20 billion would be the "worst-case scenario".
Fitch Ratings said on Wednesday the bond programme was an "important step" in Dubai's efforts to manage economic challenges and would reflect well on state-linked companies.
The Dubai fund follows 120 billion dirhams ($32.67 billion) of funding facilities set up last year by the UAE central bank and finance ministry to support banks.
Any decision to recapitalise Dubai's banks, as Abu Dhabi did earlier this month, would have to be taken by state-owned Investment Corp. of Dubai, Shaikh said.
(Additional reporting by John Irish and Lin Noueihed; Editing by Jason Neely)