The Souk al Manakh: Kuwait's first big bubble

New-found wealth in Kuwait helped create an ultimately doomed market.

In the first oil crisis of 1973, Arab states placed an embargo on crude exports to the US in protest at its support of Israel in the Yom Kippur War. That was followed by the oil crisis of 1979, when Iran's energy production fell after the Iranian revolution. Those events drove oil prices to new heights and made many people in the Gulf wealthy. In Kuwait, the new-found wealth flooded the economy suddenly and, in the long run, destructively.

One result of higher oil revenues in Kuwait was a new appetite for investment that led to the establishment of the Souk al Manakh, a market separate from the main Kuwait Stock Exchange on which people could trade in shares of foreign companies. Many Kuwaitis borrowed from banks to finance trading on the Souk al Manakh, helping push the value of securities listed there to absurd heights. By the early 1980s, the market was the third-largest in the world.

But like all bubbles, the Souk al Manakh's burst. It happened in 1982, set off by a bounced cheque that touched off a cascade of margin calls and losses. Most of Kuwait's banks became insolvent because of the crisis, having lent heavily to traders who could no longer afford to repay loans. The government responded by bailing out the banks, setting a precedent that survives to this day. Many traders, investors and even consumers in Kuwait now expect government help in times of crisis, a classic example of "moral hazard", or the effect of governments coming to the rescue during periods of financial turmoil.

Echoes of the Souk al Manakh crisis are still discernible in Kuwait's speculative and rumour-fed markets, as well as in frequent pleas from investors for government aid during market slumps. [e-mail]