CATCH 22 IN THE GULF - MORE LAWSUITS POSSIBLE?

Asa Fitch of the National newspaper (Abu Dhabi) has written an illuminating article about the dispute, drawing interesting parallels with Dubai World.

As well as offering a neat summary of the history of the dispute, the article highlights how the region's banks have been affected by the Al-Gosaibi / Saad Group dispute and how they have changed the way they do business themselves: they have, for instance, begun to "re-evaluate the age-old practice of name lending".

Furthermore, as Asa Fitch writes, after the two companies started to miss payments to banks in the Gulf, the banks "made an additional $2.6bn of provisions [cash set aside as a cushion against bad loans] in the remainder of the year, a rise analysts say is attributable mainly to the Saudi defaults...The groups were estimated to owe UAE banks $3bn, suggesting that more than half of the provisioning by banks in the latter half of last year could have been linked to exposures to Saad and Al Gosaibi."

Mr Fitch goes on to argue that the "strains caused by the saga...have so far been much greater than difficulties stemming from the better-publicised Dubai World debt restructuring. The banks have yet to take any write-downs on Dubai World loans because the conglomerate is continuing to make scheduled interest payments as it works towards a debt deal."

In making that comparison, Mr Fitch has hinted at one of the greatest difficulties of this dispute, an issue both simple and serious, which has caused so many problems for the region's banks.

Banks have not had to take provisions with regards to Dubai World, because it is servicing its debts. They were forced to with regards Saad Group and AHAB because those two companies were (are) not. But this is the Catch 22. For the very nature of the dispute has prolonged the banks' exposure to the two Groups, worsened the situation and actively prevented either party servicing their debts.

Take, for example, the fact that AHAB sought and obtained a freezing order in the Cayman Islands for $9.2 billion of Maan Al-Sanea's assets. So, despite Mr Maan Al-Zayer's (see our previous post) repeated statement that all debt would be serviced, the company is unable to do so.

Or, on the other hand, consider the simple fact that AHAB's position is that their debts are the responsibility of Maan Al-Sanea and therefore the duty to service them is not theirs - a position that Maan Al-Sanea contests. Therefore, once again, as things stand the banks are left with little prospect of recovering what is owed to them (hence all the provisions) until the dispute is settled one way or the other.

How likely is that, however? As Mr Fitch points out, a panel was set up in Saudi Arabia to investigate the myriad allegations. We are approaching that panel's first birthday and, seemingly, it has found nothing of note. Nothing to report on yet, at any rate.

One has to wonder what the Gulf's banks think about the lack of movement, because with the situation seemingly at an impasse, with freezing orders in place, and with blame so vigorously disputed they face continued exposure to the loans they made. It will be interesting to see how long their patience lasts and whether more lawsuits - launched by them - could be on the way...

Read the full National article here: http://www.thenational.ae/apps/pbcs.dll/article?AID=/20100502/BUSINESS/705029964&SearchID=73389661512208

And please post your thoughts on the complex situation below.