As readers will have noted, economics is not the primary focus of this blog. Occasionally an economic story involving Saudi Arabia will come out that recommends itself because of what it says about Saudi society and its mores. This is one of those, I believe…
In many ways, the structure of Saudi society, whether on the personal or business levels, is like an onion, with layers upon layers of relationships. Those relationships carry obligations, whether legal or purely society. Here, it appears—at least as reported in London’s The Times—that Saudi banks are getting preferential treatment by the Saudi government in the turmoil following problems with the Saad Group and Algosaibi & Brothers megafirms. British banks are calling foul and expect the Saudis to give evenhanded treatment to all banks with exposure the those companies’ financial problems.
Trade minister flies to Saudi Arabia to persuade defaulters
to treat creditors equally
Patrick Hosking, Financial EditorLord Davies of Abersoch, the Trade Minister, flew to Saudi Arabia last night to try to defuse a growing dispute that bankers say could do as much damage to the Gulf’s bruised financial reputation as the Dubai shock of ten days ago.
Bankers are furious that two defaulting Saudi conglomerates that owe $20 billion (£12.2 billion) appear to be favouring local banks over foreign creditors. State-owned Royal Bank of Scotland, HSBC and Standard Chartered are all understood to have exposure to Saad Group and Ahmad Hamad Algosaibi & Bros (Ahab). Dozens of other Western banks are also owed money, including Citigroup and BHP Paribas.
Bankers suspect that the two family-owned businesses, which defaulted over the summer, have privately reached agreement with local Saudi banks over restructuring their loans while leaving foreign banks in the cold. One senior banker told The Times yesterday: “Local banks appear to have been given preference.”
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December:11:2009 - 22:00
YO YO WE ALL COMING TO ? THE MONEY
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$?????????????????????????$$$$$$$$$$$$$$$$$$$$$$$$$$$???????????????????????????????$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$???????????????????????????????????$$$$$$$$$$$$$$$$$$$
December:12:2009 - 02:31
If Saudi is indeed giving preferential treatment to domestic banks over foreign, ignoring the concept of pari passu, then it is creating a rod to beat itself with. Not immediately, but in months and years to come, the consequences of those actions and those of Dubai’s, in walking away from the debt of Dubai World will come to haunt them.
In future borrowings for parastatal, quasi-governmental projects, a Sovereign Guarantee will become mandatory. No more pretence that “of course, the Government would never allow a default”. This means SABIC companies, VELA (a Saudi Aramco subsidiary) and many others will no longer be treated as “sovereign” and will pay the price in higher lending margins.
If you want to enjoy all the protection and benefits that the Western legal system provides (and these loan agreements are almost uniformally subject to English Law), then you have to play by the rules. Whether you like it or not. The Saad/Gosaibi situation is no different; break the rules and live with the consequences. It is all a matter of trust.
December:12:2009 - 07:35
Absolutely. Doing business will become more expensive, no matter the business.
It’s the same deal, in a different realm, as was the pre-9/11 issuance of visas to Saudis. Pre-9/11, there was no nationality that was a better risk to be given visas to visit, work, or study in the US. Where other countries, including first-world countries, always had ‘visa status-jumpers’ who would overstay, seek to change their status, or otherwise game the system, the Saudis were practically perfection. They almost never tried to change their visa status and almost never stayed in the US, returning the the KSA when the purpose of their visa was accomplished. Afterwards, Saudis faced among the most challenging processes to get visas to the US for any reason.
December:12:2009 - 23:21
I believe the Russians tried the sovereign guaranty route for a few years in the 1990s, with some amusing results, for example creditors attempted to seize Russian fighter jets at Paris air shows to pay off debts. These sovereign guarantees are a lot of trouble for all concerned and do a lot to poison international relations between the parties so affected – which doesn’t mean they are wrong.
Note that in Dubai the locals are also getting favored treatment, as Dubai World is taking the position that it won’t dump assets to pay its creditors unless it can sell at the price and profit Dubai World wants – that is, they’re defaulting on their loans to foreigners in an attempt to make the fortunes of rich locals untouchable.