FT Alphaville » Bahrain: Saudis in, violence up and capital out

Further crackdowns took place in Bahrain on Wednesday with the army calling a curfew in parts of Manama and banning gatherings until the situation was “back to normal”, reports the FT on Wednesday. Other Gulf monarchies have, as you know, provided military, financial and political support to the ruling Khalifa family.

The violence has picked up; Al-Jazeera reported at least six deaths on the island on Wednesday and the FT included reports of shootings in Sitra, amongst other places:

Later, gunfire erupted in the Shia stronghold of Sitra, where a witness said security forces, who had surrounded the village, were opening fire with live ammunition at protesters, who had fled into buildings.

The witness told the Financial Times that military helicopters were also firing down into the village.

Meanwhile, from Reuters’ Martin Dokoupil on Wednesday:

Prolonged unrest in Bahrain could threaten its status as a Gulf Arab financial hub, triggering capital flight as the instability disrupts the banking system and puts its currency under pressure.

A banking source speaking on the condition of anonymity said 15 to 20 percent of deposits and investments of high-level Bahraini citizens in private banks have been withdrawn over the past few days as the clashes with security forces unfolded.

“A lot of clients are pulling out their money, they’re moving it to London, Europe, wherever. It’s not a question of taxes, but of access to their money,” another banker from the region said.

“One client pulled out $30 million in a matter of days. With banks closed, movements are limited, we will see the rush when they reopen,” he said.

Banks were closed Wednesday in Manama’s financial district, the stock market was closed and the central bank resisted pressure on the Dinar-USD peg from a location outside the capital.

These facts prompt the following questions about the reported withdrawals: (1) how much? (2) by whom? (3) how? (4) where are they now? (5) where are they going? And (6) what role are regional SWFs playing?

In its rationale for downgrading a series of Bahrain’s ratings on Tuesday, Fitch reflected that financial services make up 25% of the kingdom’s output. The Reuters report cites estimates that Bahraini banks hold $200bn in assets, including $10bn in mutual funds, and with foreign claims on banks amounting 92 per cent of GDP.

The GCC would surely act to prop up Bahrain’s financial sector if it came under continued threat, but a precedent has been set and if protests continue this will increase pressure to find a resolution to the standoff — which could of course lead to a further crackdown and a violent, vicious cycle.