naked capitalism

Large current account surpluses do not mean a country’s are on a sound footing, as Japan, China, and now the Gulf States illustrate.

A big bank near-failure in Kuwait has led the central bank to mount a rescue plan, and is weighting guaranteeing bank deposits. As the example of Ireland showed, bank guarantees (when stronger than those prevailing in the region) will syphon deposits from banks that lack such a backstop, which in a worst-case scenario can morph into a bona-fide run (the flip side is that if the Gulf States have tough currency controls, other central banks in the area may not be forced to respond in kind).

The Wall Street describes not only the Kuwaiti emergency measures, but other interventions by oil-producing nations to combat the economic fallout from a sudden decline in the price of oil:

Kuwait’s central bank guaranteed bank deposits and cobbled together a hasty bailout for one of the country’s largest banks.

The Kuwait intervention is the first bank rescue in the oil-rich Gulf…the explosive, petroleum-fueled growth of the Gulf now looks suddenly vulnerable at the same time as international and local investors are pulling back sharply.

Saudi Arabia, in an apparent bid to ease the fallout of the global credit crisis on its citizens, said it would funnel some $2.3 billion in loans to low-income borrowers. And in Dubai, real-estate brokers in the Mideast boomtown said they are seeing signs of price weakness for the first time in years, as financing dries up and speculators bow out of the once red-hot market….

International investors — many of whom simply opened up local bank accounts in anticipation of a strengthening of regional currencies if they abandoned their peg to the dollar — rushed out of those trades late in the summer and early last month when it was clear governments weren’t going to act.

That left many banks strapped for cash, and scrambling for ways to make new loans. When international borrowing seized up last month, the region found itself stuck in its own credit crunch.

But it was currency trades — not bad loans — that plunged Kuwait into a banking bailout on Sunday. Gulf Bank said defaults by counterparties on bad euro-dollar derivatives contracts forced the bank to seek government intervention.

The bailout further roiled Kuwait’s stock market, which fell 3.5%, adding to losses that have pushed the country’s main market index down 19% this year. Other regional markets fell sharply as well….

On Sunday, Kuwaiti traders, clad in white flowing robes and waving placards, staged their second stock-exchange walkout in as many trading days. (Kuwait’s market is closed on Fridays and Saturdays.) Protesting before a government building in downtown Kuwait City, they demanded more state intervention in the markets to prop up share prices. The chief executive of the National Bank of Kuwait, Ibrahim Dabdoub, called on authorities Sunday to close the exchange altogether…

Gulf finance ministers met Saturday in the Saudi capital of Riyadh to discuss a unified response to the same seize-up in local credit markets that has plagued the U.S. and Europe and now threatens government and privately funded projects across the Gulf…

“Given the overriding paternalism of the public sector, it seems unlikely that governments are yet ready to tolerate high-profile bankruptcies or defaults,” says Tristan Cooper, vice president for Moody’s Investor Services in Dubai.

The article also discusses at some length how Dubai’s real estate market appears primed for a fall.

Further detail from AP (hat tip reader Matt D):

Kuwait’s decision to stop trading in shares of Gulf Bank sent a shock wave through the country’s bourse, which closed down almost 3.5 percent and brought its year-to-date losses to over 19 percent….

The central bank order said trading in Gulf Bank shares would be suspended pending an investigation into the derivatives deals that caused the losses. The bourse’s statement said some investors had balked at covering their losses, but neither the central bank nor Gulf Bank indicated the scope or timeframe of the bank’s losses.

But one banking official with access to the information estimated the bank’s losses at up to $749 million. The official spoke on condition of anonymity because of the sensitivity of the issue…

The Gulf Bank news further fueled market turbulence in the broader GCC, not just in Kuwait, a tiny country which is far more dependent on oil revenue than many of its other Gulf counterparts.

Oman’s stock exchange was down about 8.29 percent while Qatar’s exchange was off almost 9 percent. Saudi’s benchmark Tadawul index was down a moderate 3.06 percent, a day after plummeting over 8 percent.