Bahrain closed its bourse and the cost of insuring against default surged to the highest since July 2009 after the country declared a state of emergency and Saudi Arabian-led forces failed to quell anti-government riots.
Bahrain’s five-year default swaps surged 44 basis points yesterday to 359.37, surpassing Lebanon, who has a lower credit rating and has been struggling for months to form a government. Bahrain’s swaps have increased the second most in the world this year after Pakistan, according to CMA prices in London. Fitch Ratings lowered the kingdom’s credit rating yesterday.
Clashes between the mainly Shiite Muslim protesters in Bahrain and forces from their Sunni government injured hundreds and drew comments from Shiite-ruled Iran, which criticized the military involvement from the Gulf. Bahrain is home to the U.S. Navy’s Fifth Fleet and its ruling family has close links with Saudi Arabia, a key ally of the U.S. in its attempts to halt Iran’s nuclear program.
“From a market fear standpoint, the Bahrain situation really boils down to how Iran will react if the military starts coming down very hard on the protestors,” said Akram Annous, Middle East and North Africa strategist at Al Mal Capital PSC in Dubai. “Will it just be saber rattling or does it turn into something more?”
Fitch lowered its rating on the nation’s foreign debt two levels yesterday and said another downgrade is possible. Bond yields and credit risk of governments in the Middle East surged this year as popular uprisings toppled leaders in Tunisia and Egypt, the most populous Arab country where the bourse has also been shut since Jan. 27.
The yield on Bahrain’s 5.5 percent bond maturing in March 2020 climbed 30 basis points, or 0.3 percentage point, to a record 6.88 percent yesterday, data compiled by Bloomberg show. Fitch cut the nation’s credit rating to BBB, the second-lowest investment grade, from A-, citing increased political risk.
Fitch rates Lebanon’s debt B, five steps below investment grade. Credit-default swaps for Russia, rated the same as Bahrain by Fitch, rose 5 basis points yesterday to 137, while those of Lebanon climbed 4 basis points to 359.17.
Bahrain’s benchmark BB ALL Share Index lost 1.3 percent this year. The turmoil has sent the Bloomberg GCC 200 Index of Persian Gulf stocks down 8 percent this year.
The island-nation’s security forces clashed with protesters today in the capital Manama and hundreds of riot police were deployed. Clashes between the protesters and Bahraini forces escalated on March 13, with more than 100 people injured as demonstrators demanded democracy through elections. King Hamad bin Isa Al Khalifa declared a three-month state of emergency.
“The biggest danger is that Bahrain becomes the battleground for Saudi Arabia, the U.S. and Iran in the same way Lebanon has traditionally been the place that geopolitics played out,” Oliver Bell London-based, senior investment manager at Pictet Asset Management said yesterday. “It wasn’t clear things had escalated inside Bahrain to necessitate the request for help from Saudi Arabia.”
Saudi Arabia helped broker a peaceful resolution to Lebanon’s civil war, which ended in 1990. The kingdom, the world’s top oil exporter, supports Sunni allies in Lebanon against Hezbollah, a Shiite group backed by Iran.
The outlook for Bahrain’s rating is negative, indicating that more downgrades may follow, Fitch said. Bahrain’s credit ratings were lowered Feb. 21 at Standard & Poor’s.
“The two-notch downgrade reflects further material escalation in political risk in recent days, following significant violent domestic protests, military intervention by Gulf nations and the imposition of a state of emergency,” Purvi Harlalka, Director in Fitch’s Middle East and Africa Sovereign Ratings Group, said in a statement.
The country has 2.87 billion dinars ($7.61 billion) of debt outstanding, data compiled by Bloomberg show. Debt equaled 33 percent of gross domestic product in 2010, Fitch said in its statement.
“They are not particularly credit constrained,” said David Zervos, managing director of global fixed income strategy at Jefferies & Co. in New York. “There’s credit risk in the short term with the short-term turmoil. Longer term, these are probably much stronger bonds than maybe the ratings downgrades would indicate.”
Iran’s Foreign Ministry spokesman Ramin Mehmanparast said yesterday that “the presence of foreign troops and meddling into Bahrain’s internal affairs will only further complicate the issue.”
Bahrain’s king has offered a national “dialogue” toward limited changes in response to the protests. Along with Saudi Arabia, the United Arab Emirates has sent some 500 soldiers to Bahrain, U.A.E. Foreign Minister Abdullah bin Zayed al Nahyan said. The GCC this month agreed to provide Bahrain and Oman, another country that has seen protests, with $10 billion each over a decade to promote development.
A basis point on a credit-default swap protecting $10 million of debt from default for five years is equivalent to $1,000 a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
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