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Wed 21 Sep 2011 11:18 AM

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Bahrain's default risk climbs before elections

Risk at six-month high amid fears tensions may flare as Bahrain goes to polls

Bahrain's default risk climbs before elections
Bahrains default risk climbed to the highest since its widespread political protests in March

Bahrain’s default risk climbed to the highest since March,
at the height of confrontations between government troops and protesters, amid
concern tensions may flare up before Sept 24 parliamentary elections.

The cost to insure Bahrain’s debt against default rose to
328 Monday from a post-crisis low of 219 on July 22, according to five-year
credit default swaps from data provider CMA.

The contracts surged to 359 on March 15 as Bahrain declared
a three-month state of emergency and Gulf troops arrived to help quash the
one-month rallies by mostly Shiite protesters.

The protests, by the mainly Shiite majority, left 35 people
dead, hurt tourism and spurred the central bank to cut its forecasts for
economic growth this year by two percentage points to 3 percent. Standard &
Poor’s and Moody’s Investors Service reduced Bahrain’s credit ratings. Credit
Agricole, France’s second-largest bank by assets, is relocating its regional
headquarters out of Bahrain, two bankers familiar with the matter said last

“Political explosion aggravates credit risk,” Sergey
Dergachev, who helps manage the equivalent of $8.5bn in emerging-market debt at
Union Investment Privatfonds in Frankfurt, said in an emailed response to
questions Sept 19. “Risk for more CDS rising will be much higher” if the government
and mostly Shiite opposition don’t reach a compromise, he said.

Bahrain, home to the US Fifth Fleet, holds special elections
on Sept 24 to fill seats vacated by 18 lawmakers who belong to al-Wefaq, the
country’s largest Shiite party. The parliamentarians left to protest the
government’s crackdown on the demonstrators. The group has said it will boycott
the vote and won’t field any candidates.

Shiites represent about 70 percent of the country’s
population of 1.2 million, according to the US State Department, and have long
demanded rights equal to those of Sunnis, including appointments to senior
government and military posts. In the 1990s, Bahrain was shaken by violence stemming
from Shiite disaffection.

Full-scale protests have stopped, though tensions persist,
with almost daily, low-level rallies in Shiite villages that government troops
respond to with tear gas and rubber bullets. Checkpoints prevent the
demonstrators from marching toward the city and the Pearl Roundabout, the
epicentre of the February and March protests. The circle has been destroyed by
the government and replaced with an intersection.

“We’re probably
gearing up for a more violent end of year for Bahrain,” Ahmad Alanani,
Dubai-based head of fixed-income sales for the Middle East and North Africa at
Exotix, said in a phone interview from Dubai yesterday.

“It’s a problem that’s going to continue growing and it’s
going to continue to put pressure on the economy and continue to put pressure
in terms of foreign direct investment coming to Bahrain.”

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Bahrain’s default risk is the fifth-highest in the Middle
East, according to CMA. Swaps in Egypt, where a popular revolt toppled the
country’s long-time leader, Dubai, which was at a brink of default in 2009, and
war-torn Iraq, trade higher.

Economic growth this year won’t exceed 1.6 percent, Standard
Chartered said in an emailed report yesterday. Growth was 4.1 percent last
year. The number of tourists in the first quarter declined 36 percent and
hospitality output slumped 29 percent, followed by a drop of 30 percent in the
second quarter, the bank said.

 “We are cautious on
Bahrain from a credit perspective,” Philippe Dauba-Pantanacce and Victor Lohle
wrote in the report. “Bahraini issuers - both sovereign and corporate - will
find it difficult to tap international capital markets in the current

Bahrain’s situation is slated to become tenser as online
organizers of the “Blockade Bahrain” campaign are calling on anti-government
demonstrators to use their cars to block main roads and highways around the
capital, Manama, starting today. The Information Affairs Authority said in a
Sept 19 email that those “who engage in this activity will not be acting out of
civil disobedience but instead will be breaking the law.”

Officials in the country, which became a monarchy in 2002,
have accused Shiite-led Iran of supporting the protesters, an allegation
al-Wefaq denies. Saudi Arabia, a Sunni kingdom linked to Bahrain by a causeway,
is a rival to Iran for influence in the region.

“These fights in Manama only underline the problem that the
political impasse is already there,” said Dergachev.

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