The global financial storm rolled across the Persian Gulf

Photo courtesy of WSJ
According The Wall Street Journal, The global financial storm rolled across the Persian Gulf on Sunday, as Kuwait's central bank guaranteed bank deposits and cobbled together a hasty bailout for one of the country's largest banks.

By Oil prices down more than 50% from their July highs, The Gulf now looks suddenly vulnerable at the same time as international and local investors are pulling back sharply after the Gulf had seemed relatively immune to the current crisis.

High oil prices have allowed state and private investors across the Gulf to funnel billions of dollars into property markets, infrastructure projects and, more recently, foreign-exchange speculation. In particular, many foreign and local investors earlier in the summer made speculative currency trades, betting that regional governments would drop their currency pegs with the dollar to help tame rising domestic inflation.

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.

Chart courtesy of WSJ
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.

Companies, banks and individuals have been burned by sharp moves in global currency markets as fears of economic distress prompt an unwinding of trades that have depended on borrowed money. The dollar and the yen have both soared against nearly every other global currency over the past month as investors became convinced that a world-wide recession was looming. This has been particularly problematic because investors have bet heavily on emerging-market currency positions.

Several governments even took dramatic pre-emptive moves, funneling billions of dollars of cash into their relatively small but liquidity-starved banking systems. Earlier this month, Saudi Arabia promised $40 billion in lending facilities to banks that needed cash. The United Arab Emirates pledged a sweeping three-year guarantee on domestic bank accounts and promised to back up interbank lending.

Much of the Gulf has budgeted for much lower oil prices. Gulf states, on average, need prices above $47 a barrel to keep from running budget deficits. But some states are more vulnerable than others: Bahrain's so-called break-even price is $75 a barrel, compared with Saudi Arabia's $49 and Kuwait's $33, according to the International Monetary Fund. The speed of crude's tumble -- to about $64 a barrel -- has unnerved officials despite the apparent cushion. At an emergency meeting on Friday, the Organization of Petroleum Exporting Countries hastily decided to cut output by 1.5 million barrels a day, the biggest single cut in almost eight years.

Real-estate markets in Dubai is now a clear slowdown. Speculators, especially those who were financing their property investment, have largely fled the market.

Gulf Bank Customers Rush for Deposits After Currency Losses

According to Bloomberg today, Customers rushed to withdraw money from Gulf Bank KSC, Kuwait's second-biggest bank, after clients defaulted on currency contracts and the central bank was forced to guarantee deposits. In the first signs of a bank run in the Persian Gulf, some Gulf Bank customers demanded money in a panic.

Gulf Bank may have losses of as much as 200 million dinars ($746 million) on the trades, Ibrahim Dabdoub, chief executive officer of National Bank of Kuwait SAK, said yesterday. Gulf Bank had assets of 5.09 billion dinars at the end of March and deposits of 3.2 billion dinars, according to Bloomberg data. It has 44 branches across Kuwait, its Web site says.

Central Bank Governor Sheikh Salem al-Sabah said yesterday that Gulf Bank lost money on currency derivatives after the euro declined against the dollar, state news agency KUNA reported. Gulf Bank will absorb the losses until it can work out an agreement with clients.

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4. Swiss banking collapse is going to be one biggest domino to fall
5. US Credit Crunch Hits South Korea

Sources :

1. Bloomberg: Gulf Bank Customers Rush for Deposits After Currency Losses, October 27, 2008 05:50 EDT
2. The Wall Street Journal: Financial Storm Hits Gulf, October 27, 2008

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