Regular government bailouts of Arabian Gulf nationals risk creating more trouble for banks at a later date with citizens likely to binge on debt, according to a new report from Fitch Ratings.
With the UAE and Kuwait both attempting to provide debt relief to their citizens, the ratings agency has warned that banks and governments will ultimately bear the cost.
Kuwait's parliament approved a plan this month to write off US $2.6 billion (Dh9.55bn) of its citizens' debts.
But Fitch warned that measures to repay loans by governments would encourage more reckless borrowing in future. "They need to be coupled with regulation to deter reckless borrowing and lending to stave off negative implications for banks and sovereigns," Fitch said.
"A recurrence of a consumer debt boom could occur if borrowers take on excessive amounts of debt in the expectation they will be cleared by the authorities."
The UAE also established the Dh10bn Nationals' Defaulted Debts Settlement Fund to clear the debts of Emirati defaulters as part of debt-relief measures, which included the immunisation of Emiratis from serving jail time for bounced cheques.