It's Come To This: Even The Arabs Need Bailouts

Gotta go. It’s time. I’m picking up some guns, some gold necklaces from Kay jewellers, and taking the ‘hound straight to Idaho.

WSJ: 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.

The Kuwait intervention is the first bank rescue in the oil-rich Gulf, which until now had seemed relatively immune to the current crisis. It came as local markets across the region continued their steep selloffs. With oil prices down more than 50% from their July highs, the explosive, petroleum-fuelled 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 for those of you who thought there was one safe (rich) haven in the world…sorry!

…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.

Property investors “are not finding buyers,” says Tanya Vodenicharova, a property consultant at Dubai real-estate broker 9 Properties. A significant property-market correction in Dubai could crimp government finances, slowing or halting the debt-fuelled economic expansion.

Here’s how it happened

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.

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.

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