Under the gun: how they stopped the great Gulf panic

By Ron Cooper,
with contributions from Garry Evans and Julian Lewis

Much of what happened to the banking systems of the Gulf states in the first days and weeks following Iraq's invasion of Kuwait on August 2 remains steeped in mystery. Bankers in Saudi Arabia, convinced the authorities were tapping all international telephone calls, talked guardedly. Banks and monetary authorities dissembled, desperate to play down the runs on the banks and on the local currencies. Foreign bankers had left en masse, so were not in a position to comment.

Euromoney has pieced together the true picture. US editor Ron Cooper had spent the months before the invasion researching a profile on the Saudi Arabian Monetary Agency. Using his Saudi contacts, and with contributions from Euromoney editor Garry Evans, who visited Bahrain in late August, and reporter Julian Lewis, who interviewed Arab bankers in London, he reports on how the banks and monetary authorities of Saudi Arabia, Bahrain and the United Arab Emirates weathered the crisis and what will be its long-term effects on them.

Among the predictions:

• Several banks — particularly offshore banks in Bahrain — will have to be rescued by the authorities. Others will be forced to merge.

• The banks that survive will have to shrink their balance sheets dramatically. Profits will fall by up to 50%.

• As Gulf banks liquidate their portfolios, markets around the world will be hit by sudden fire sales.

• The $15 billion withdrawn from Gulf banks in August is just a start. Middle class Arabs will emulate the rich, by moving more of their assets offshore, into London real estate and Swiss bank accounts.

• The region's economies will be in a mess, with inflation rising and budget deficits widening as the central banks spend to prop up local institutions and currencies.

• Private banks will become profitable as oil wealth returns.

• Foreign banks which cut credit lines and pulled out — notably the Japanese — will be ostracized from future business in the region.

• And if Saddam Hussein is beaten, the boom times could be back. Banks would profit from the rebuilding of Kuwait and the opening up of Iraq.

The figures are staggering. In less than two weeks after Iraq's invasion of Kuwait, some $15 billion maybe of freely withdrawable deposits — was pulled from bank accounts in Saudi Arabia, Bahrain and the United Arab Emirates. The size of the outflow and the speed with which the money moved have crippled the region's banking system and created anxiety that, if the military situation deteriorates, bank collapses and economic chaos could follow.

In those first two weeks there was near-panic in most of the Gulf, but particularly in the part of Saudi Arabia closest to the Kuwait border. According to estimates by a Gulf economist, 15%-20% of Saudi bank deposits in riyals, the equivalent of $2.4 billion-$3.2 billion, had been withdrawn by mid-August. Another $1 billion was taken out of foreign currency accounts.

Little of that money departed the kingdom as dollar bills — perhaps only $100 million during the first two weeks. The more serious capital flight was reserved, as always, for transfer within the banking system, particularly to Switzerland. Moreover, a proportion of the dollars and riyals, frantically accumulated in cash by frightened depositors, never left the country at all.

"Inside the kingdom," says one resident, "you had to have a survival kit. " The kit varied according to an individual's means, but it basically consisted of food, water, gasoline, tape to seal a room from poison gas, a caged bird to detect the gas, plus a few thousand US dollars and a few thousand riyals.

“The cash is to keep at home in case the Iraqis walk in," the visitor says, "and you want to rent a car to go to Jeddah, buy a ticket, tide you over in London or wherever until your account gets sorted out. That money is not going anywhere; it will stay in Saudi until this plays itself out."

The UAE was worse affected than Saudi Arabia. In the first week of the crisis between 12 billion and 15 billion dirhams ($3.2 billion-$4 billion) was pulled out of emirates' banks by depositors, "a sum in the region of one quarter of the banking sector's total liabilities", in the words of one Dubai banker.

Some sources say the haemorrhage of deposits was worse — perhaps as much as 40% of liabilities.

Dubai was particularly badly affected because it is home to a large transient community of foreign workers, trading houses and companies, which were quicker to shift deposits than the locals. Some UAE bankers contend that emirates' nationals were just as panicky but will be quicker to bring their money back once the crisis is over.

As the leading offshore banking centre of the region, Bahrain probably suffered the most. According to the Bahrain Monetary Agency (BMA), the central bank, 7% to 8% of deposits were withdrawn from both the local and offshore banks. The small local banks were worst affected. Economists reckon that they may have lost ($1.1-$1.5 billion) of their deposits. The 55 offshore banking units (OBUs), which had assets of $73 billion at the end of June, fared a little better.

Says Ghazi Abdul-Jawad, general manager of Gulf International Bank, the second-largest Bahraini OBU: "At GIB there was not a massive withdrawal of deposits. Certainly there were some funds shifted to other branches of GIB and to institutions abroad. But I'm pleased to say that after a few days some of the funds were redeposited with GIB."

What is most worrying is that the capital flight is far from over. Bank customers with time deposits, for example, have not yet been able to withdraw their money. As the deposits become due, many will be reinvested outside the region. In particular, Bahrain OBUs, which have a high proportion of their liabilities in the form of time deposits and so less affected by withdrawals in August, will see a gradual leakage of funds.

The region's monetary authorities were insistent that depositors, whether individual or corporate, should not be allowed to break time deposits at banks. During the first week of the crisis some good clients at Saudi banks were reportedly allowed to break deposits with loss of interest only. In Bahrain, some depositors clamoured to withdraw time deposits with as little as a day left to run despite the fact that they would lose all interest.

By the start of the second week, banks changed track and would not allow breaking of deposits. "This happened in Saudi Arabia, in Bahrain, and in other places in the Gulf," says a well-known Gulf economist. "The central banks have quietly instructed the commercial banks to respect this regulation. This has reduced the capital outflow a little bit."

The reaction of the BMA to the problem was rather counter-productive. It put out a statement saying that banks were not obliged to pay time deposits early. The move back-fired. The treasury manager of a UAE bank with large deposits in Bahrain told wire services the following day: "To suddenly say that deposits cannot be broken before maturity has created a lot of uncertainty and a lot of awkward situations."

Sheikh Ibrahim al-Khalifa, deputy governor of the BMA, defends the agency's action: "There is not a clear conclusion. People rushed to the banks and put pressure on them to break time deposits. That would have affected the profitability of the banks. Therefore the laws should be maintained. Bahrain was looked to for a lead."

The Gulf banks' problems are compounded by the panicked wholesale severing of international interbank credit lines. Together with the mass withdrawal of retail deposits, this represents a dramatic shrinking of the banks' liabilities and will force them to shed assets.

Admits Abdul-Jawad of GIB, which had assets of $9.9 billion at the end of June: "On December 31 our balance sheet will certainly be very different from what it was in June."

Typical was the reaction of one prominent UK bank. The head of treasury describes the events: "On day one, we cut immediately all lending lines to organisations without a value-added relationship to us. The foreign exchange lines were kept; on day two, we evaluated which of those to cut."

The bulk of the credit-line cutting took place on Monday, August 16, after western bankers had had a weekend to digest the invasion's implications. Their deliberations usually led to one conclusion: cut everything.

"The damage wasn't limited to any one country," says an Arab banker. "It was a blind panic, regardless of nationality. We saw Egyptian banks being cut, Swiss Arab banks, everyone."

Some western banks tried to make Gulf banks which came under US and UK blocking orders on August 2 repay interbank placements early. "On Friday August 3 I had several calls from worried European correspondents asking me to shorten the maturities on time deposits,' recalls Mustapha Serageldin, chief European representative of the Bank of Kuwait and the Middle East (BKME). The correspondents' requests were too late: BKME was already frozen. "It is extraordinary to me that sophisticated European institutions thought we could find ways to pay after being frozen. It would have been illegal. I could no more pay them than they could pay me.”

Some western bankers deny that their reaction was quite so knee-jerk. The Middle East regional manager for another big UK commercial bank says his bank didn’t cut lines. "We've been there for decades and decades, and we're not looking at a radical cutting and cancellation of lines in any shape or form," he says. He claims his bank's Middle East exposure has been sliced by only 5%, and the Saudi exposure by a negligible amount.

While patting his bank on the back, he did allow that "obviously you've got to keep your exposure short when there's such fear and uncertainty" as during the first week of the crisis. How short? Forward foreign exchange business, he says, would go down to one month instead of three or six months. "We're not completely back to normal yet, because it's not a normal situation, but certainly the lines of credit to Saudi banks are still there "

The very largest Gulf banks may have escaped this treatment: David Drumm, senior vice-president and London branch manager of GIB, says he is "pleased, overall, with the way our correspondent banks have treated GIB". Even so, that "overall" gives a hint of how Gulf banks have fared in looking to western counterparties for credit to keep them liquid.

Bankers argue over which nation's banks panicked the most. "US banks, with some well-known exceptions, have not been accommodating. The attitude in Europe has been extremely variable," says David Dale, senior vice-president at Bahrain Middle East Bank.

Dale says UK banks have been the most supportive of Gulf counterparties, taking their lead from the Bank of England, Serageldin of BMKE, who is also chairman of the Arab Bankers' Association, is less sure: "UK banks have overall been no better or worse than banks in other western countries. Some have been extremely supportive, others very difficult and obstructive." Other Arab bankers point out that UK banks quickly stopped accepting Gulf currencies in London, for in- stance, because of lack of demand.

Rumours suggest that monetary authorities put pressure on foreign banks. "I know SAMA (the Saudi Arabian Monetary Agency) has taken an active interest in banks which have cancelled lines of credit," says a senior British banker, "and I think a certain amount of pressure was put on those banks to reinstate lines. I know I certainly would not want to get on the wrong side of those people." Other bankers deny that arms were twisted.

The British banker says he has heard nothing of such pressure. Neither had his direct counterpart at an American money-centre bank. Contact may have occurred at the very top levels but nothing has filtered down to either regional director.

Arab bankers' greatest venom is reserved for the Japanese, who were particularly quick to cut their lines. "The Japanese have shown themselves to be fair-weather friends," comments one Bahraini banker. The hasty exodus of the Japanese from the region left an unpleasant taste — one that will linger. During the first couple of days of the crisis the Japanese closed their offices, collected their families and left.

"It was amazing," says a Saudi banker bitterly. "They just packed up one morning and left. There is not one Japanese left in the entire Middle East. I think they effectively said, ‘We don’t give a damn about oil, about Kuwait, about the whole damned place. Whatever the price is, we’ll pay it'."

"There was never any threat that Bahrain would be invaded," observes a banker in Bahrain. "In fact, about the only dangerous place on the island was between a Japanese banker and the airport." Many US bankers left the region, too; those who stayed feel the runaways will find the doors closed if they return. "People will laugh at them," says an Indian banker working for an international bank in Bahrain.

Those who did stay — and who were circumspect in cutting lines — could benefit in business terms. Europeans in particular were less inclined to rush for the airport. Comments al-Khalifa of the BMA: "We say we take comfort in seeing the (Japanese and Americans leave). Their departure... does not help the situation or confidence in Bahrain. The citizens of Britain and France are nearer to the situation and so are able to analyse it better."

Abdul-Jawad of GIB is particularly angry about the shenanigans of some international banks. He says that a number of foreign banks refused to pay out when GIB tried to effect payments from its nostro accounts with them. "My account was not blocked. I asked them to pay. If you have my money in your account then you should pay. To make excuses is totally unacceptable," he says. Many banks, he says, delayed and refused payments, making excuses such as "We had a clerical error" or "the computer went wrong". And he says: "I’m very angry because of the invasion and because the subsequent events also shattered many of the beliefs I had about international banking. Those events were an eye-opener and we now know who are our friends."

As the banks' liquidity evaporated, many were forced to make distress sales of assets. Even the region's major banks, such as GIB, have had to shed assets to stay afloat. In the second week of August, GIB dumped between $300 and $500 million in Mexican instruments on to the secondary market in LDC debt. "We intend staying as liquid as possible for as long as possible, in order that we and our clients come through this. Although it involves some loss in immediate profitability, this is the only course for prudent bankers to take," says Drumm.

Throughout the month markets around the world suddenly faced massive sell-offs that they put down to Gulf banks. On August 16, for example, the price of Brazilian debt on the secondary market suddenly plummeted from 19 cents to 15. As the liabilities side of the banks' balance sheets shrinks further, other markets could see further sudden unexpected fire sales.

Which banks are most in danger of succumbing to the pressure? In Saudi Arabia the weaker banks surprisingly suffered less from massive withdrawals than their stronger cousins. That's because much of the weaker banks' deposit base is government-related and is not so sharply affected by panic withdrawals.

The performance of one of the newer banks during the early days of the crisis supports this view. Gauged by its thumping 6.46% return on assets, Al-Rajhi was easily the most profitable bank in the kingdom in 1989, according to Capital Intelligence, a Cyprus-based bank rating and research agency. True to its money changing roots, Al-Rajhi makes a healthy living from, among other things, pro- viding transfers for expatriate labourers who come in with monthly cheques to wire money home. "That business is unbelievably lucrative," says a competing banker.

Yet in the first week Al-Rajhi found itself in more trouble than any other Saudi bank, says a competitor. Why?

"Al-Rajhi's treasury operation was unable to cope with the vast withdrawals. So it went to its direct account with SAMA and started overdrawing it massively. Al-Rajhi is a very solid bank, make no mistake about it, and it is now back in good shape, as are all the Saudi banks. It was just that during that temporary squeeze, because of [AI-Rajhi's] inability to manage their books, SAMA basically had to extend a helping hand."

Adds analyst Mardig Haladjian of Cyprus-based Capital Intelligence: *Its deposits are mostly demand deposits for expatriates and those are the people who panicked the most in the first few days."

An official at one Saudi bank where treasury operations were in trouble, says: "That rumour [that SAMA had to help out] is baseless. We were in no difficulties, none at all."

The liquidity pressures nearly sent some Dubai banks to the wall too. Capital Intelligence believes that there were runs on two Dubai banks triggered by fears of their insolvency. A senior foreign banker in Dubai says that as a result "people were forced into unauthorised overdrafts with the central bank". He says "two or three" domestic UAE banks and "one or two" foreign banks took this course to keep themselves liquid.

Foreign banks, unlike the worst-hit domestic banks in the UAE, were mostly able to fund themselves in the overnight market. This was expensive because the prime money-market rate more than doubled to 11% during the first two weeks of August. Given this possibility, the senior foreign banker attributes the foreign banks' overdrawing at the central bank to "bad treasury management, plain and simple".

By the end of August the situation had calmed down. "We're seeing international banks dealing with the region again on a limited scale," says a Bahraini economist. With better access to lines from abroad, banks in Saudi Arabia and the UAE began to help out institutions in Bahrain. Banking hours in Bahrain returned to normal — during the first weeks of the crisis the banks had stayed open late into the evening to accommodate customers wanting to make withdrawals.

Many western institutions had returned claiming they had never left — after some arm-twisting by SAMA and others. The panic had turned to worry and unease. Not a single bank had gone under; all the Gulf currencies were being traded at their pre-invasion rates. "Having the American soldiers here has added a lot to confidence," says Mohammed al-Shroogi, head of Citicorp Investment Bank in Bahrain.

Long-term, though, the outlook is bleak. "Even if it is all over in 10 days’ time," says the American director of a Bahrain OBU, "banks are going to have to reconsider their positions. Everyone in the Gulf is rethinking their assets and where they are invested. After the dust settles there will be fewer deposits available in the region."

Many say that the biggest effect will be that moderately wealthy middle-class Arabs, who have never bothered with bank accounts in Switzerland and London, will now feel happier to hold a proportion of their net worth outside the region. One Bahraini banker quotes the example of a businessman friend who was planning to build a BD1 million house on the island. "Since the invasion he has changed his plans," says the banker. "He will now build a BD500,000 house and spend the rest on buying a flat in London." Real estate agents in London have already noticed increased demand for properties in the £1 million-plus bracket.

The greatest psychological shock was provided by the failure of many Kuwaitis to keep assets offshore. the Iran/lraq war began in 1980 and Kuwait looked in danger of invasion from Iran, Kuwaitis switched their money into Switzerland and other centres. As the threat appeared to subside they gradually brought back most of the flight capital. Citizens of Saudi Arabia and Bahrain do not intend to make the same mistake.

Confidence in the region has been so badly shaken that new business will be desperately difficult to attract, say bankers. "Would you invest here now?" asks one Gulf banker. Several major infrastructure and industrial projects in the region, offering lucrative financing opportunities for its banks, have been put on hold. Meanwhile banks' increased day-to-day costs of funding, caused by the sharply higher overnight market rates, will cut further into the profitability of the business which remains.

The irony is that the shock of August 2 happened just when Gulf banks thought the worst was behind them. After a disastrous decade, during which their regional and LDC loans had gone sour with monotony and the Iran/lraq war had depressed opportunities for new financings, Gulf bankers enjoyed a rare golden period in 1989 and 1990. "Since the end of the Gulf war there had been a resurgence of confidence and business across the region, particularly in Dubai," says Dale of Bahrain Middle East Bank.

The overall effect of the invasion on Gulf banks has been "pretty catastrophic", says Dale. He finds it "difficult to see any short- term return to normality: the damage already done will take years to repair". Even if the military situation does not degenerate into all-out war, thinks Dale, the most hopeful outlook for any of the Gulf banks is a drop in annual operating profits plus considerable extra losses on loans outstanding to Kuwaiti banks.

The most severe problem for many banks will be finding new lending opportunities. “‘Where do we go now?' was the question on everybody's lips before the invasion," says a senior Bahraini banker. "We've kept clear of country lending since the LDC crisis. Few Of us are keen on corporate lending, especially for HLTs [highly-leveraged transactions]. Also the region itself has lacked good financing opportunities."

Some of the weaker banks will not survive. The liquidity crisis brought several banks in Saudi Arabia, Bahrain and UAE to the brink of collapse. Only central bank support kept them solvent. Now they must adjust to slashed profit expectations.

The stronger Saudi Arabian banks may be the least badly affected of financial institutions in the region. They have some hope of a cushion against the full extent of a Gulf banking downturn, according to analyst Haladjian of Capital Intelligence. Saudi Arabia's decision to lift its oil production by 2 million barrels a day offers the prospect of some new business for Saudi banks.

Prospects in Bahrain, where the liquidity crisis brought on by capital flight and cutting of bank lines was most pronounced, are less good. Analysts predict a 30% drop in profits for the coming year. The Bahraini banking sector, particularly its OBUs, also has the greatest direct exposure in the Gulf to Kuwaiti banks.

It is estimated Bahraini banks have several billion dollars placed with Kuwaiti institutions; by contrast, Saudi banks have only around $300 million. But there are hopeful signs that some of this money may be recoverable. As Euromoney went to press, Saudi bankers were reporting that they had been assured by at least one Kuwaiti bank that payment on its obligations would be made from London.

Some Bahraini bankers, trying to look on the bright side, argue that a shake-out would be no bad thing. "In a way Saddam's done Bahrain a favour," says the managing director of a small OBU. "It was chugging along not really knowing what it was doing. Now it's got to work that out. It will concentrate the minds of banks on what the business really is. The banks that are here because the investors thought it was a good idea to have a bank may rethink that."

Bahrain's economy will be badly hit. Banking accounts for some 10%-15% of GDP, a proportion similar to that of oil. The last time the offshore banking industry went through a sticky patch — in 1985, when the Iran/lraq war escalated — GDP declined by 6% the following year. This time, economists warn, the hit could be much worse. Says one economist at a Bahrain bank: "The banks are going to start being realistic all of a sudden. Many will pull out and a lot will shrink. They are already shedding assets and will soon start to lay off staff."

Rising inflation could be a problem in Bahrain — and elsewhere. The BMA let cash in circulation rise 35% in the first weeks of August as it pumped liquidity into the market to prop up the banks. In coming months it may need to start printing money to rescue banks as they get into trouble. In addition, it may have to spend its reserves buying dollars to defend the dinar. And since local banks were the principal buyers of government bonds it could be faced with difficulties in funding the budget deficit. In mid-August the BMA was forced to cancel the weekly tender for treasury bills after the previous auction had only elicited as much in bids (BD 14.5 million) as there was paper on offer.

The outlook for the UAE is less clear cut. On the positive side, few of the emirates' banks are significantly exposed to Kuwait. However, the scope for an oil cushion is less than in Saudi Arabia because the UAE consistently breached its Opec production quotas before the oil embargo was imposed on Iraq and Kuwait. Bank profits are expected to fall by 25%.

UAE bankers expect the economic vibrancy of Dubai to sustain them. "The lack of confidence is felt more internationally than here,” says one Dubai banker. "Many people here are still looking to expand. You didn't see the same exodus of business funds that there was of personal savings. Remember that much of the trade from here is outside the Gulf. It is continuing, and it always needs financing."

The authorities in all the Gulf states are expected to support any banks in trouble rather than let them collapse. Bankers point to the rescue of Arab Asian Bank by BMA in 1985. SAMA, too, stepped in to support Riyad Bank in the 1980s and propped up some of the weaker banks — especially Saudi Cairo Bank — when collapsing oil prices caused problems in the 1980s. "Their track record on this is good, and I think they added to it during this crisis," says one.

But Gulf banking is now so fragile, many observers believe, that central banks will have to step in to arrange mergers as the only way to shore up some of the weaker institutions.

"Mergers and rationalisation are a global trend in banking," says one banker. "It follows that it is being considered in the Gulf. The present situation may force the issue." One source claims that a merger between some weaker government-controlled banks in Kuwait was being planned at the time of the invasion.

With the exception of SAMA, which has always opposed bank mergers, Gulf central banks have long pressured their weaker charges to find strong partners. Unless a bank has failed, this pressure has been generally resisted by shareholders, whether private or governmental. "Merger is a concept rejected by the Arab mentality," says one Gulf banker.

Having supported ailing banks during the post-invasion liquidity crisis, central banks may now get their way over mergers. Some bankers think SAMA will be forced to change position. "There will be no blueprint to the merging," says a senior banker. "It will happen case by case where the central bank can play the extra card. The central banks may even find themselves bypassed by the rulers. They hold stakes in many banks and might bring the partners together themselves."

Amid the gloom and predictions of disaster, there are also some purveyors of an optimistic scenario. Serageldin of BKME is one. If Saddam is defeated and Kuwait liberated, many financing opportunities will open up, he says, not least the funding and management of repairs to Kuwait's infrastructure.

It's a long shot, but the other possible winners from the crisis could be the foreign private bankers. If the higher oil price brings wealth back to the region (and the extra money isn't all spent on weapons), but a continuing lack of confidence prompts high-net-worth individuals to increase the proportion of their money invested offshore, foreign banks managing the funds for them could benefit. Citi's al-Shroogi recalls that on the day after the invasion he ran out of application forms for new private banking accounts and had to have more flown in on the next plane from Europe.

The performance of the region's central banks in the next weeks and months will be the key to maintaining a semblance of stability. They have clearly learned a lot from the events of the first two weeks of August.

The near-unanimous verdict of the region's bankers is that the Bahraini authorities take first prize for their handling of the crisis. The BMA reacted swiftly and in exactly the right way. "They supplied a very calming influence," says a senior offshore banker on the island.

"The solution was very clear," says al-Khalifa, deputy governor of the BMA. "We had to act in an orderly manner and show that the agency was ready and willing to supply all liquidity to the market instantly." For several days the BMA pumped cash into the local market. Cash in circulation jumped from BD96 million at the end of July to BD135 million on August 10. By August 19, as the bank runs subsided, it had fallen back to BD115 million.

SAMA's performance was a little less than perfect. Even the organisation's cheerleaders concede it was a little slow off the mark and had dithered for 48 hours. After that tentative beginning it caught fire. They were weak for one or two days, then they really picked up," says one banker in the kingdom. "Since then, they have really done an unbelievable job in the crisis. I cannot speak more highly of them.”

During the first week of the crisis, SAMA got in touch with local banks and spread the word that it would support them no matter what happened. It kept very close tabs on reporting mechanisms so it would understand the dimensions of the crisis; it helped the banks flood the market with cash, and, by one account, during the second week was poised to go to the Bank for International Settlements (BIS) and to G7 central banks for additional liquidity, but ultimately did not have to.

To help bolster riyal liquidity SAMA agreed to raise the amount of development bonds it would repurchase from the Saudi banks to 50% from 25%. This allowed the banks to borrow twice as much from SAMA on the bonds they were holding. According to one published account, this increased riyal liquidity by SR2 billion.

The Central Bank of the UAE (CBUAE) doesn't win many plaudits. Many of the emirates' bankers believe its actions were inadequate and slow. "They were not quite aware of the scope and seriousness of the problem until the [Islamic] week beginning August 11," complains one banker. Worse, even during that week the central bank's response was to make pronouncements on the normality of the situation and the absence Of problems.

This so angered bankers struggling to manage in a liquidity vacuum that some openly challenged the central bank. Sultan Nasser al-Suwaydi, chief executive of Abu Dhabi Commercial Bank, was one: "I put forward my own view that to over-react would be preferable to an under-reaction," he says. "l said that we should be prepared for the worst in terms of liquidity and the further cutting or reduction of lines, so should be relying on our own resources." He believes the bank's statements of market normality were "well-meaning but not calculated properly: we have to be realistic".

Finally, al-Suwaydi says, the CBUAE did take the steps that were appropriate "under the circumstances of an unexpected and large shock". Others are less complimentary. "They are obviously patting themselves on the back but they failed to bring liquidity and so drove money-market rates up," complains one banker.

Bankers looked to the central bank to state that it would stand behind them as a lender of last resort. The statement did not come. "I believe that would have helped our vulnerability to credit-line cutting," says a senior banker at a small Dubai bank.

Euromoney made repeated attempts to contact officials at the central bank for comment but was unsuccessful.

A priority for central bankers in the immediate future will be to maintain the level of their currencies, all of which are linked to the dollar.

During the first two weeks of the crisis Gulf citizens were desperate to dump local currencies in favour of the dollar. The rush for cash was severe enough to produce a black market for dollars. Artificially pegged at SR3.75 to the dollar for many years, the riyal suddenly plummeted to SR5.5 to the dollar, according to one Saudi banker, who claims that profiteering by money-changers was partly to blame. The Bahraini dinar behaved similarly , jumping from the long-established rate of 0.37 to 0.05 before the BMA intervened to push it back.

The CBUAE was also strict in its maintenance of the dirham. Early in the crisis it made a clear statement that it wanted the rate of the dirham to the US dollar to remain stable. When the rate slumped anyway, it put out an explicit warning to money changers, threatening to revoke the licences of any which did not conduct business in all Gulf currencies at normal market rates.

The rush for dollars reached its peak during the first week and spilled into the first part of the second. For banks and monetary authorities it became priority to flood the market with dollars. It was perhaps the single act that would most soothe all the raw nerves.

The BMA supplied the market with foreign currency in cash as well as dinars. "It is not our responsibility to supply US dollar rates," says al-Khalifa. "But we knew there might be a shortage. The agency went out of its way."

To meet the demand for greenbacks throughout the region, dollars poured in from New York, London, Zurich, Singapore wherever there was excess cash immediately available. Transportation costs made cash airlifts expensive but the banks had little choice. At the height of the crisis, every two or three days one of the Saudi joint venture banks was shipping in $25 million in cash in $50 and $100 bills from London.

There were, as always, unexpected ironies. As US military personnel began to arrive in significant numbers incoming soldiers were told to go to a certain bank to get local currency. "When the run was most severe," says a Saudi banker with a chuckle, "on one window we would have a queue of American soldiers giving us dollars for riyals, on another we would have Saudis desperate to obtain dollars for riyals. Actually, it eased problems at some of our branches dramatically. We made some money out of it, too."