Gulf Financial Turmoil

The recent sharp drop in the markets and the Gulf States’ loss of international confidence are unexpected byproducts of the global financial storm. The region, formerly expected to not only bear the brunt of the economic storm, but to prosper, as it buys up cheap US assets, is now looking increasingly distressed. Although the “Dubai dream” is not over, it is starting to fray. The “decoupling” theory has since taken shelter, along with the argument — that the US market, however relevant, is destined to drown by itself, because it no longer fuels the world’s economy. Faced with what Greenspan has called “a once-in-a-century credit Tsunami,” Kuwait provided guarantees to forestall its second largest bank from failure, and protected deposits at other banks; the UAE, in turn, injected liquidity into its economy. Such aggressive action, after the Gulf States stated that they were protected from the US-precipitated crisis, stoked fears, instead of soothing them, in that, why such firm action, if there were no structural vulnerability? Although the recent Gulf downturn may be due more to international consumer hysteria, than to balance-sheet fundamentals, this chain of events could expose the region to economic contradictions inherent in massive government spending, low administrative domestic gas/oil prices, and falling international oil prices. Add to this cocktail, a lack of consumer confidence in the region’s banking system. Unless calmer heads prevail both domestically and internationally, this dream could be adjourned.


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