Where is the last place on earth you’d expect a bailout would be needed . . . due to a real--estate bubble bursting . . . and banks failing . . . and stock markets crashing . . . and that has derivatives counterparty losses? It’s the Gulf countries (GCC) in the Middle East and, in particular Kuwait. **ya coulda knocked me over with a feather**
Bloomberg reports that “Abdullah Hajeri led a march on the Emir's palace in Kuwait last week, demanding that the oil-rich nation's ruler stop stocks from plunging. Adnan Mohammed Saleh said he wants more government protection from the global financial crisis.” “Every day the market is crashing,'' said Saleh, a 42-year- old trader, staring dumbfounded at the Dubai Stock Exchange's ticker. “ **the government is responsible for stock market prices . . . where did we hear that one before?**
Things a little better at the pump lately? Well, one man’s gain is another man’s cliff dive. The region's rulers are under pressure as crude prices have fallen 50% from a record $147.27 in July. Stock indexes in Dubai and Saudi Arabia have fallen a similar amount. **you mean they didn’t save those windfall profits for a rainy day? Oh, that’s right, it doesn’t rain there**
Bernanke-Style Bailout
Last week Kuwait became the third Gulf state to “prop up” its banks. Its central bank created a $19 billion facility to help banks make loans. Saudi Arabia, the world's largest oil exporter, put $2.7 billion into a government-run bank in Riyadh to provide no-fee loans to low-income citizens.
And a Bank Run
The bank bailout came after losses on currency derivatives at Gulf Bank KSC, Kuwait’s second-largest lender by assets. This resulted in a surge in customer withdrawals from the bank. In response, the UAE announced a FDIC-style guarantee of deposits of all local lenders and large foreign banks. **moral hazard anyone?**
Last week Kuwait became the third Gulf state to “prop up” its banks. Its central bank created a $19 billion facility to help banks make loans. Saudi Arabia, the world's largest oil exporter, put $2.7 billion into a government-run bank in Riyadh to provide no-fee loans to low-income citizens.
And a Bank Run
The bank bailout came after losses on currency derivatives at Gulf Bank KSC, Kuwait’s second-largest lender by assets. This resulted in a surge in customer withdrawals from the bank. In response, the UAE announced a FDIC-style guarantee of deposits of all local lenders and large foreign banks. **moral hazard anyone?**
More Derivatives’ Losses
Citibank’s Middle East economist Mushtaq Khan explains that Gulf Bank took a bet that the euro would continue to strengthen against the dollar. When the dollar unexpectedly and rapidly rose against the euro, the bank faced a problem with its counterparty commitments that ultimately required central bank intervention. ** this is the sort of thing should be swept under the rug; that’s what we do**
Citibank’s Middle East economist Mushtaq Khan explains that Gulf Bank took a bet that the euro would continue to strengthen against the dollar. When the dollar unexpectedly and rapidly rose against the euro, the bank faced a problem with its counterparty commitments that ultimately required central bank intervention. ** this is the sort of thing should be swept under the rug; that’s what we do**
More Evidence that Decoupling is a Myth
All capital markets in the Gulf Cooperation Council (GCC), which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, have declined and interest rates have increased since Lehman Brothers’ bankruptcy on Sept. 15.
All capital markets in the Gulf Cooperation Council (GCC), which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, have declined and interest rates have increased since Lehman Brothers’ bankruptcy on Sept. 15.
Of the Gulf States, Dubai likely will be hardest hit by a global economic slowdown. Dubai has borrowed heavily to finance its transformation from a Persian Gulf trading post to a financial and tourist hub. Foreign investors are gone and there has been a sharp decline in tourism, both of which this land-of-the-most-expensive-hotel-rooms-in-the-world relies on.
According to Moody’s, “government-controlled companies owe at least $47 billion, more than Dubai's GNP. They will continue to accumulate debt faster than the economy grows.” **as the economy grows? . . . what if it doesn’t grow?**
Real Estate Bust
“Dubai property prices will likely remain unchanged through 2010 after quadrupling in the past five years”, Colliers CRE Plc said. According to Nouriel Roubini, “There is a liquidity and credit crunch and now oil prices have fallen to $70 from $140. I see the risk of a real-estate bust throughout the Gulf, but specifically in Dubai. There's a huge amount of excess capacity being built.''
“Dubai property prices will likely remain unchanged through 2010 after quadrupling in the past five years”, Colliers CRE Plc said. According to Nouriel Roubini, “There is a liquidity and credit crunch and now oil prices have fallen to $70 from $140. I see the risk of a real-estate bust throughout the Gulf, but specifically in Dubai. There's a huge amount of excess capacity being built.''
The Middle East's largest publicly-traded real-estate developer Dubai-based Emaar Properties PJSC is down more than 26% just since Sept. 15. Investors have lost confidence in Emaar’s ability to finance projects by borrowing through local and international banks.
Will Dubai turn into an Inland Empire-style ghost town? We’ll see.
mg
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