Saudi default swaps jump on Bahrain contagion concerns

Bloomberg/London

A Bahraini man holds up a scarf with Arabic writing that reads, "I love you my country” as thousands of anti-government protesters returned to Pearl Square in Manama yesterday. Unrest in Bahrain, which is linked by a 26km causeway with Saudi Arabia, and whose capital, Manama, is only a four-hour drive from Riyadh, has in the past spread across the border

Credit-default swaps on Saudi Arabia surged on concern political unrest in neighbouring Bahrain will spread to the world’s biggest oil exporter.
Swaps on Saudi Arabia, used as a measure of confidence in the country although they reference no debt, jumped 11.5 basis points to 138, the highest since July 2009, according to CMA.
Contracts on Bahrain rose for a fifth day, climbing 21 basis points to 307, the highest in 19 months.
Governments are cracking down on pro-democracy activists as uprisings that toppled autocratic leaders in Tunisia and Egypt spread to Libya, Iran, Algeria and Yemen. Clashes in Bahrain, a close Saudi ally, increased as security forces used tear gas against protesters, gunfire was heard and ambulances were on the streets of the capital.
"The impact of Saudi unrest on oil prices would escalate further the inflationary pressures already building within the global economy,” said Greg Venizelos, a credit strategist at BNP Paribas SA in London.
Unrest in Bahrain, which is linked by a 26km (16- mile) causeway with Saudi Arabia, and whose capital, Manama, is only a four-hour drive from Riyadh, has in the past spread across the border.
In 1995 the Saudi government arrested a large number of Shia Muslims in the Eastern Province on suspicion of involvement in protests taking place in Bahrain, according to Human Rights Watch.
A member of the Saudi royal family, Prince Talal Bin Abdul Aziz, said in an interview with BBC Arabic TV that unless King Abdullah introduces more political participation and human rights, the nation may also see protests.
"Unless problems facing Saudi Arabia are solved, what happened and is still happening in some Arab countries, including Bahrain, could spread to Saudi Arabia, even worse,” Prince Talal told the London-based TV broadcaster in an interview aired late on Friday.
Tension is building throughout the Middle East. Credit- default swaps on Dubai increased 13 to 436, Abu Dhabi was up 6 at 107 and Qatar rose 3 basis points to 105, all the highest since January 31. Egypt increased 5 basis points to 355 and Israel was up 5 at 152, the highest since July 2009.
A basis point on a credit-default swap protecting $10mn 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.
"Tensions in the Middle East are nothing new, but the latest bout covers virgin territory and has the potential to extend from the short to the medium term,” Harpreet Parhar, a strategist at Credit Agricole SA in London, wrote in a note.
Unrest in the Middle East so far has had limited impact on sentiment outside the region. The Markit iTraxx Crossover Index of 50 companies with mostly junk credit ratings fell as much as 6 basis points to 379, the lowest since January 3, 2008, according to JPMorgan Chase & Co.