Trade suspension a plausible solution

Recessionary panic is now looming larger than ever since the subprime crisis cut short the bull run in the Kuwaiti stock market. But the reported 200 million Kuwaiti dinar (Dh2.74 billion) derivative loss of Gulf Bank of Kuwait (GBK), the country's second-largest commercial bank , refreshes the memory of the Barings Bank's failure arising out of disproportionate stock index future positions.

In a black swan-impacted stock market, in which stock prices breach the expected loss level in every trading session, the decision to halt the trading of Gulf Bank's shares has caused severe damage to the already battered Gulf Cooperation Council (GCC) capital market. The Central Bank of Kuwait's intervention to guarantee all deposits taken by Gulf Bank was timely but for which there would have been a bank run. The fallout of the incident was a march by brokers towards the Ruler's palace demanding suspension of trading by the Kuwait Stock Exchange (KSE) to arrest its dramatic plunge.

It is feared that this incident will escalate into a larger disaster in the KSE (or may for the GCC as a whole), comparable to earlier financial disasters such as Souq Al Manakh in 1982. Although the Kuwait stock index's 20.74 per cent loss is at the lower level compared to other GCC market indices, and most critically when compared to the Gulf Base GCC (GBGCC), which is at a whopping 47.74 per cent. The panic in Kuwait was aggravated by the rumour that Citibank was preparing to end operations in Kuwait. The bailout plan of GBK could not arrest the fall of the KSE, it lost 2.06 per cent in morning trade on October 29, when the market absorbed all the news.

Authorities in the KSE did not wish to halt trading in the exchange. Importantly, Mustafa Al Shimali, Kuwait Finance Minister, reportedly said a halt of trading was not like "closing down a grocery store," and will not keep the market from falling. But it is an unusual time which should be tackled in an unusual manner.

The Russian stock exchange was closed for two days on September 17 and 18 after the markets plummeted 25 per cent in three days. Russian benchmarks had lost more than 55 per cent since their peak last May. Russian authorities halted trading and introduced a package of emergency loans and tax cuts to halt the crisis which brought back memories of the 1998 rouble crash. The suspension worked temporarily as the indices rose after the suspension was lifted. Trading on the Russian Stock Exchange was suspended again for two hours in anticipation of massive fallout from the rejection of a bank bailout by the US Congress on Sep-tember 30; however, the indices sank again when the market re-opened.

Investors have withdrawn billions of dollars from Russia's oil-fuelled economy since its war with Georgia in August. Sliding oil prices and concerns about the depth of financial and economic woes in Europe and the US sent shares into freefall in recent weeks, contributing to the Russian market's worst-ever trading days and culminating in suspension of trading on several times in Black October.

Black October

Stock exchanges worldwide halted trading temporarily under selling pressure using the 5-10 per cent circuit breaker. SET -50 in Thailand and ATX -20 on the Vienna Stock Exchange were halted on October 10 when they fell by 10.02 per cent. and 10.91 per cent respectively.

The Nairobi Stock Exchange halted trading for 15 minutes on October 8 after the index dropped by more than five per cent, violating its trading rules.

The Jakarta Stock Exchange suspended trading three times from October 8 to 10. In Sao Paulo, trading in Brazil's stock market was twice suspended on October 13 after massive losses triggered circuit breakers.

Meanwhile, the Manila Stock Exchange halted trading past mid-trade on October 27 when the key index plummeted more than 10 per cent.

Apart from banning short selling, trading of Dow Jones Industrial Average futures on the New York Stock Exchange was halted to prevent a further downfall.

Japan averted a halt in trading by shutting down the exchange on grounds of its inability to process huge orders (sell orders).

Reportedly, the G7 (Group of Seven rich industrialised nations) was mulling suspension of trading in bank shares or even suspending trading entirely, coinciding with the closure of the markets in the US and Japan on October 13 because of local holidays, as all bailouts announced by leading nations failed to arrest the collapse of the global stock markets.

The European markets witnessed more than a fifth of their market cap wiped off in five days. According to media reports, Italian Premier Silvio Berlusconi said on October 10 that global leaders might consider suspending stock market operations in response to the financial meltdown.

It's an environment of free fall in the stock markets across the globe. Banks in the Gulf have been hit by the global credit crunch, which hampered their ability to finance multi-billion dollar infrastructure and industry projects launched during the oil-fuelled econ-omic boom.

Liquidity infusions into the banking system were intended to keep the investment climate afloat and to stave off recession. But the stock market needs special and urgent action as there is no buyer in the market to offer support to equity prices.

Private investors are liquidating all kinds of financial assets, investments in real estate and even gold, and hoarding liquidity in the bank as a safe haven under the umbrella of a government guarantee of all bank deposits.

In a buyerless market, the first task should be to provide support for falling financial assets - there should be a direct liquidity infusion. At this level, the Central Bank should find financial institutions to provide support for the market.

The stock market today is unable to establish fair values of financial assets - it is dangerous and destructive.

Until the prevailing environment cools off and stocks can find rational buyers and sellers there is a valid reason for the stock market to be shut for at least a fortnight. Of course, there should be global consensus - Kuwait or the GCC would hesitate to take such a bold step unilaterally.

This step would help to ease the panic as people would have time to search for fair-value financial assets and realise that the economic scenario in the Middle East is strong and perhaps the Western recession will not hit the Gulf so severely. Meanwhile, the banks and other financial institutions should be equipped to decide upon the fair value-based support level of the stocks. Circuit breaker-based trading halt causes only panic.

It is argued that such a move would deprive distressed investors from encashing whatever they could fetch from their hard earned savings.

As Saudi Arabia unveiled plans to deposit 10 billion Saudi riyals (Dh9.75 billion) in the Saudi Credit Bank, which was established to extend interest-free loans to low-income citizens to help them overcome financial difficulties, other GCC countries may adopt the same line.

The author is Professor, Institute of Management Technology, Dubai.