Backstop Bahrain
\nPosted by Joseph Cotterill on May 26 14:15.
\nft.com\/alphaville
\nDIFC \u2013 Dubai, May 26, 2011
\nThursday\u2019s political risk datapoint:<\/p>\n
The main driver underlying Moody\u2019s decision to downgrade is the significant deterioration in Bahrain\u2019s political environment since February. The government of Bahrain has forcibly suppressed an uprising by the Shi\u2019ah-led opposition with the backing of an intervention of armed forces from other member states of the Gulf Cooperation Council (GCC), most importantly from its neighbour Saudi Arabia. Political tensions in the country remain high and there seems little prospect of the underlying causes of the unrest being peaceably resolved, at least over the short term. The political outlook is therefore highly uncertain.<\/p>\n
Moody\u2019s believes that these events are likely to have damaged economic growth significantly, especially in services sectors such as tourism, trade and financial services. These sectors had previously been championed by the government in its effort to diversify the economy away from oil. The timing and pace of any economic recovery will very much depend on political developments. In any case, the negative effect on consumer and investor confidence will likely linger.<\/p>\n
The crisis has also affected Bahrain\u2019s public finances. In February, the government announced cash transfers to families, and in May the parliament approved an expansionary budget for 2011-12. The resulting rise in current expenditure is reducing fiscal flexibility. <\/p>\n
Even as the Bahraini government is set to lift martial law at long last, Saudi and other Gulf military forces show no signs of leaving, for example.<\/p>\n
So it\u2019s a weird kind of backstop. More like a brutal embrace. But if we are talking backstops, isn\u2019t interesting to note that Bahrain government paper has traded at around 100bps tighter than Dubai debt during the Arab Spring?<\/p>\n
And that\u2019s even counting the big rally in Dubai bonds this year, a significant reason for which was the United Arab Emirates\u2019 own backstop of Dubai companies\u2019 debt restructuring.…more<\/a><\/p>\n