1 thought on “Bahrain: bellwether on Israel”

  1. Nick Stadtmiller

    I fail to see what sort of geopolitical conditions the Saudis would need to extract as part of the bailout discussion. The Bahraini government is already 100% behind the Saudi regional agenda. They are dependent on the Saudis for financial support (through allocation from the shared Abu Sa’fah oilfield) and defence (note Saudi intervention to quell unrest during the Arab Spring).
    I find it highly unlikely that any deal will involve a restructuring of Bahraini debt that includes forced haircuts, losses or new terms for bond holders. Some privately held debt may be voluntarily restructured (i.e. some official Gulf investors may agree to new terms on Bahraini bonds), but this would not be forced on international investors. There are two reasons the Saudis and Emiratis cannot risk a Bahrain default (as any forced haircut would be declared). First, the bond holders would object and file suit in London. The ensuing court case would lay bare to all how questionable the legal setup around GCC-issued bonds is, and raise further issues around contract enforcement.
    Second, it’s very hard to imagine that Bahrain could default on its debt whilst maintaining the currency peg to the dollar. Again, the other GCC countries have every incentive to prevent this. A broken peg in one country would be an open invitation for speculators to bet against the ‘stronger’ pegs of the UAE and KSA. It would be much cheaper for the Saudis to bail out Bahrain that deal with a speculative attack on the riyal.

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