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Sunday, July 31, 2011     GET REAL

Outcome of U.S. debt debate directly impacts
oil-rich Gulf states

ABU DHABI — The Arab world is closely following the debt ceiling debate in the United States.


Gulf Cooperation Council states, among the leading producers of crude oil, have been monitoring the struggle between Congress and President Barack Obama on an economic rescue package for the United States. Analysts said the six GCC states, the economies of which have been based on the U.S. dollar, would be most affected should Washington default on Aug. 2.

"There is no doubt that should the United States default that will have a knock-on effect for the dinar, riyal and other regional currencies because of the peg," James Williamson, marketing director of the Bahrain Finance Co., said.

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Analysts said GCC states were particularly vulnerable to a U.S. collapse as their oil industries charged foreign clients in dollars. Moreover, unrest, particularly in Bahrain, sparked a massive flight of the U.S. currency in 2011.

GCC and other Arab oil producers hold $270 billion worth of U.S. government debt, Middle East Newsline reported. The leading creditors include Saudi Arabia, the United Arab Emirates as well as Algeria, Bahrain, Egypt, Iran, Iraq, Kuwait, Libya, Oman and Qatar.

"The question that has been dogging investors in U.S. paper continues to haunt the markets," Yazad Darasha, editor of the Arab business Web site, Zawya, said. "Will the loss of the triple-A rating make most of this paper worthless?"

The United States has reported a debt of more than $14.5 trillion, $4.5 trillion of which was owed to foreigners. Major credit rating agencies have already warned that the United States could lose its Triple A status, a decision that was expected to further damage the American currency.

At this point, analysts said, Gulf investors have not pulled out their holdings from the United States. They asserted that other currencies, particularly the euro, were also seen as shaky amid the collapse of the economy in Greece. China's yuan is not a free-floating currency.

"We believe that the debate on the U.S. public debt ceiling will end with a compromise before the deadline," the UAE Central Bank said on July 29. "We do not believe that the U.S. government [will] default on its debts, given its enormous potential."

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