Kuwait moves to prop up major bank

Business Materials 26 October 2008 18:16 (UTC +04:00)

Kuwait's Central Bank stepped in Sunday to prop up one of the country's biggest banks and said it was considering guaranteeing deposits in domestic banks -- in one of the first concrete signs that the global financial crisis may next hit the oil-rich Gulf, CNN reported.

In Saudi Arabia, meanwhile, the government said it would deposit $2.7 billion into the Saudi Credit Bank to help lower-income citizens deal with financial difficulties, the country's Al-Ektisadiya newspaper reported.

The two moves came just a day after finance ministers from the six-nation Gulf Cooperation Council held an emergency meeting to echo assurances, which they have repeatedly voiced over the past few weeks, that the region's banks face no liquidity crisis.

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 halting of Gulf Bank shares spread panic in the bourse today, because the government has been saying banks are safe from (global financial crisis) losses," said investor Ahmed al-Fadhli in a telephone interview.

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.

Over the past few weeks, Kuwaiti investors have voiced clear concerns about the market. One stockbroker unsuccessfully sued to temporarily close the bourse while other traders last week stormed out of the exchange, demanding the government intervene to halt their near-daily losses.

Investor al-Fadhli said about 40 brokers walked Sunday from the exchange to the nearby seaside Seif Palace, demanding to see the prime minister, Sheik Nasser Al Mohammed Al Sabah, to ask for more government intervention.

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.

Sunday is a normal business day in the Arab Mideast, which usually observes Friday as the weekend.

So far, the Gulf countries have been thought to be protected from the crisis, in part because of the cushion of oil money many of them have built up during years of high oil prices. However, because most of the region's banking sector is privately held, not much is known about the institutions' true risk exposure levels.

The Gulf Bank news also appeared to have pushed the Kuwaiti government to take a step it has so far resisted -- guaranteeing deposits. The country currently makes no deposit guarantees.

The central bank said it would propose an urgent bill to guarantee bank deposits in an effort to "boost confidence in our banking sector and enhance its ability to compete with banks in countries where deposits were guaranteed by the state" but gave few details on specifics.

The guarantee would cover local Kuwaiti banks.

The various Gulf countries have taken a range of measures to maintain market confidence, including cutting interest rates and pumping billions into their economies.

In tandem, officials have repeatedly said the region is not exposed to the kind of toxic debt that has led to massive losses in the United States and spread to other global markets.

But the move to deposit funds in the Saudi Credit Bank, to be used interest-free by lower-income Saudis, showed the push many of the GCC countries were undertaking to ensure that their citizens are not affected by the current international crisis.

Much of that effort is funded by the countries' massive cash surpluses, accrued from oil wealth. But with crude prices falling, analysts say some spending may be curtailed.

The draft bill to guarantee deposits could prove to be the necessary catalyst for stability, analysts said.

But some, including independent financial analyst Ali al-Nimesh, have cricizied demands to stop trading, arguing that such a step was counterproductive and unnecessary since the daily losses have not exceeded 4 percent, compared to a more than 8 percent drop in the benchmark Saudi Tadawul index on Saturday, for example.

"Unfortunately, Kuwaitis have been used to demanding help and getting it ... and parliament has played a negative role in this," al-Nimesh said.

Lawmakers have passed pay hikes and set up a state fund to buy bad consumer debts despite strong Cabinet opposition.

The government believes oil revenues should be used for development instead of "popular" demands that do not take into consideration that oil prices might fall sharply, dragging down state revenues in tow.