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.
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Mitsubishi UFJ Financial Group Inc. slumped 11 percent after the Nikkei newspaper said the bank will have to raise funds to bolster capital.
“In this kind of market that’s moving without sensible reasons, only God knows what’s going to happen tomorrow,” said Yoshinori Nagano, a Tokyo-based senior strategist at Daiwa Asset Management Co., which manages the equivalent of $96 billion. “That’s why people are so scared of what’s ahead of them and sell whatever they have to avoid losses.”
God also knows why The Large Hadron Collider broke the other day…
The Gulf states may be setting up for the most spectacular bust in history. They have borrowed billions to build the palm islands, skyscrapers, indoor ski resort, etc, all based on rising oil prices. I wondered then–if oil prices keep increasing, who can afford to visit the other side of the world, and if oil prices dont increase, how will they service the debt? One can only wonder at the money wasted on corruption also.
Doc, the LHC incident report is out, just for you:
http://press.web.cern.ch/press/PressReleases/Releases2008/PR14.08E.html
Now, please give it a rest because it is getting older than Ray Jay Johnson.
How many bankers, bank and high rise apartments can a country the size of dubai use? Seriously.
Maybe they can turn those bankers into high rise window cleaner.
Dubai has no industry, that country’s economy has no depth.
We’re counting on the Gulf states, China, Japan, etc. to lend us the money to continue bailing out our financial system and stimulating our economy. I wonder at what point these countries are going to decide that using their currency reserves to clean up their own financial messes is more important than helping us with ours. Could be sooner rather than later if this sort of thing keeps happening.
Reasons why markets are heading are blow. Reading for the war on Syria/Iran.
http://www.marketwarnings.com/2008/10/oil-price-and-war-on-syria-and-or-iran.html
Yves, you mentioned a wild theory you had that there was a fingerprint of intervention on equity futures during the SocGen Kerviel debacle, if I recall. Any read on whether the TOPIX has a similar feel tonight?
Dubai is the most obvious bust waiting to happen along with Australian home prices! yehaaa, ride it all the way down.
The current economic climate in the United States is a crisis. However, Americans aren’t the only ones feeling the crunch. An article from The International Herald Tribune tells us about a small business owner, Dominique Boudier, owner of a printing company just outside of Paris, and how her business has been affected by the fast drying up of available credit. Her creditors are reducing their offers by as much as 50% or more, and it is by mandate of her supplier’s credit insurance companies. Her business has a 60 day lag in payments from customers, and she needs credit in order to keep the shop open when their payments are that late. Her banks’ hands are tied, and she is left fearing the worst as her bank, like many in Europe, puts all their liquid cash into the European Central Bank’s reserve depository, in lieu of reinvesting it into the economy and generating income. As banks fail and liquidity goes with it, credit is drying up rapidly. The European Central Bank functions much like the American Federal Reserve Bank to create fiat money as required. Fiat currency is effectively credit currency, but as a government’s guarantee of its value decreases, so does its value. The natural result is high inflation rates, which is happening currently. The consensus amongst many is that stronger banking systems is the correct medicine. Until the correct changes are in place, payday advance loans will be easier to come by for consumers who need short term help immediately and can’t afford to wait for the banking system.
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“Gulf Bank said defaults by counterparties on bad euro-dollar derivatives contracts forced the bank to seek government intervention.” Who defaulted; any idea, anyone?
This is the motionless canary on its back in the bottom of the bird cage, more important than the government action in and of itself. There is a colossal volume of currency swaps outstanding in the wildest currency environment in two generations. If we have a default rate for these instruments even no worse than the surprisingly mild 3-5% default rate on the Lehman’s debt swaps—*gaaackk* An isolated bank implosion is to be expected in present conditions, but what led to this one is worth knowing.
who were those defaulting counterparties indeed?
there are no lawsuits, no news on the wires.
ahh, and dubai already having one of the busiest airports in the world running at 85% capacity is building a new airport as well. only 10 times bigger though.
Well, i believe that even they prolly wont be hit as much since they possess large bounties of rainy day funds. i mean, even if oil prices are going down, most of these countries have been preparing their budgets assuming oil prices of between 40 – 60 dollars a barrel, so they wont really be hit anyway. combine that with the funds they have, and life is certainly a million times better over there than in NY.
Maybe the oil-producing nations will think twice in the future about keeping oil production so constrained that the price contributes to worldwide economic malaise.