Bahrain Credit Risk Exceeds Lebanon After Fitch Cuts Rating

The cost of insuring against a default by Bahrain surpassed Lebanon for the first time since July 2009 as officials declared a state of emergency and Fitch Ratings lowered the Persian Gulf nation’s credit rating.

Bahrain’s five-year default swaps surged 44 basis points yesterday to 359.37 while contracts for Lebanon, whose debt carries a lower credit rating, climbed 4 basis points to 359.17. Bahrain’s swaps have increased the second most in the world this year after Pakistan, according to CMA prices in London. The Gulf nation’s stock exchange suspended trading today.

Bahrain security forces clashed with protesters today in the capital Manama and hundreds of riot police were deployed. 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. Iran condemned the “meddling into Bahrain’s internal affairs” as troops from the six-member Gulf Cooperation Council arrived to bolster security.

“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.”

Rating Outlook

Bahrain’s King Hamad bin Isa Al Khalifa declared a state of emergency for three months as mainly Shiite protesters in Bahrain, which is ruled by Sunnis, demonstrated, demanding democracy and free elections. Shiites are the majority in Bahrain and are from the same branch of Islam as practiced in Iran.

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.

The outlook for Bahrain’s rating is negative, indicating that more downgrades may follow. Bahrain’s credit ratings were lowered Feb. 21 at Standard & Poor’s.

Lebanon Assassination

“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.

Syria sent troops into Lebanon in 1976, a year after civil war broke out. Saudi Arabia helped broker the Taif Accord that ended the 15-year civil war in 1990. Syria pulled its remaining forces out in 2005 amid an international outcry in the aftermath of the assassination of former Lebanese premier Rafiq Hariri.

Bahrain has the lowest proven crude oil reserves in the region, according to the U.S. Energy Information Administration. Its unemployment rate is 3.8 percent, Finance Minister Sheikh Ahmed bin Mohammed al-Khalifa said March 11.

Limited Changes

The country, home to the U.S. Navy’s Fifth Fleet, 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 ruling family has close links with Saudi Arabia, which holds 20 percent of global oil reserves.

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.

‘Kind of Massacre’

A Bahraini protester ran over a policeman with a car and killed him yesterday, the kingdom’s official Bahrain News Agency reported. Earlier, one protester was killed in the town of Sitra, Al Wasat newspaper reported on its website, without saying how it obtained the information.

“It was a kind of a massacre,” lawmaker Mohammed Baqer said in a telephone interview yesterday, saying that he and a fellow lawmaker, Nada Haffad, have quit to protest the violence, which he blamed on the government. The protesters are “young people ready to die,” he said.

The escalation in violence followed a decision by the GCC this month to provide Bahrain and Oman, another country that has seen anti-government protests, with $10 billion each over a decade to promote development.

Credit default swaps on Bahrain have almost doubled from 185 basis points at the start of 2011, according to CMA prices in London.

Default Swaps

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.

The yield on Bahrain’s 6.247 percent Islamic note due June 2014 gained 57 basis points yesterday to 4.45 percent, the highest in more than a year, data compiled by Bloomberg show.

Fitch said that the downgrade also reflected the risk that instability in Bahrain may harm its “attractiveness as an international financial and business center, which plays an important role in Bahrain’s economic model.” Financial services make up 25 percent of the country’s output, it said.

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