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Qatar diplomatic crisis puts focus on US, UK financial firms' counterparty risk

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Qatar diplomatic crisis puts focus on US, UK financial firms' counterparty risk

The diplomatic row between Qatar and several of its Persian Gulf neighbors has put the spotlight on the risk profile of banks with counterparty claims or investments in the nation's bonds.

Several nations, including Saudi Arabia, severed diplomatic ties with Qatar on June 5, alleging the gulf state had financed terrorism. The confrontation escalated through the week as banks based in Saudi Arabia and the United Arab Emirates suspended business activities with their counterparts in Qatar.

In the banking industry, United Kingdom-based banks have the most exposure to counterparty claims in Qatar. And several U.S. insurance companies have millions of dollars invested in Qatar bonds.

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The exposures are a tiny part of the financial companies' total assets, and several rating agencies noted that the Qatar government remains in a strong financial position. S&P Global Ratings reported that Qatar's net general government assets amounted to 120% of the country's gross domestic product. In a similar vein, Moody's pointed to the assets of the country's sovereign wealth fund, the Qatar Investment Authority, as a buffer against a potential fiscal crisis.

Despite that, the cut in diplomatic ties is creating uncertainty around Qatar's financial health. S&P Global Ratings lowered the government's long-term rating one notch to AA- on June 7, citing the possibility that a fiscal crisis stemming from slower economic growth as a result of lower regional trade could affect the nation's investment entities, especially considering nonresident deposits in Qatar's banking system had already increased in the months leading up to the June 5 diplomatic split.

"It could mean that government support would be needed in some form to offset any potential major outflow, including the potential use of [Qatar Investment Authority] assets, in addition to the central bank's contingency reserves. Moreover, we now consider risks to external financing lines to the whole economy, including foreign direct investment, portfolio flows and to the financial sector to be elevated, and this could lead to pressure on Qatar's pegged monetary arrangement," S&P Global Ratings said.

Further, Moody's credit analysts said the country's credit strength could be affected if Qatar's isolation continues. While financial market reaction so far has been "manageable" in their view, they noted in a June 8 report that if the crisis persists, it "would potentially have a more marked financial effect and increase funding costs for the sovereign and other Qatari entities."

In the banking sector, U.K. banks have the most counterparty exposure to Qatari entities, representing 56% of counterparty claims and 46% of counterparty liabilities. From a dollar perspective, that represents $31.4 billion of claims and $13.0 billion of liabilities. In a May 8 research note, S&P Global Ratings noted that Qatari banks have seen a sharp increase in external debt, raising the banks' risk profiles even before the diplomatic row hit. The largest Qatari bank with available data is Qatar National Bank (Q.P.S.C.) with $204.0 billion of total assets, including $5.0 billion of loans to other countries in the Gulf Cooperation Council, a group that includes Saudi Arabia and other nations at the center of the dispute.

The cost of insuring Qatari debt has spiked since the crisis hit, jumping 51.1% from June 2 through June 7. Still, the midpoint price of a credit default swap as of June 7 was 89 basis points, which is below the year-ago figure of 114 basis points.

Finally, among U.S. insurance companies, MetLife Inc. has the most exposure to Qatar bonds on a nominal basis with $117.9 million of holdings. But that represents just 2.15% of the insurer's total foreign government-issued bonds and 0.06% of its total bonds. On a basis relative to foreign government-issued bonds, Allstate Corp. has the highest exposure at 12.81%, although as a portion of total bonds the exposure is just 0.05%.

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S&P Global Market Intelligence and S&P Global Ratings are owned by S&P Global Inc.

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Click here to view country level information about Qatar.

For additional information on Qatar's sovereign wealth funds, look up Qatar Investment Authority or Qatar Holding and click on "Investments" on the entities' tearsheets in S&P CapIQ.