Gulf Arab stock markets slumped Tuesday and the cost of insuring Bahrain's debt surged, as investor unease with the political volatility in the tiny island nation appeared poised to grow with the declaration of a three-month state of emergency.
The declines, also fueled by fears of further trouble in earthquake and tsunami-battered Japan, reflected the continuing volatility in Mideast markets, where weeks of anti-regime protests that have swept through the Arab world are crafting daily a new political dynamic while unsettling investors.
"It's to be expected, given what's happening today in Bahrain," said John Sfakianakis, chief economist for the Riyadh, Saudi Arabia-based Banque Saudi-Fransi. "The shock waves are felt throughout the region."
The latest cause for concern came after the six-member Gulf Cooperation Council deployed a Saudi-led force to prop up the monarchy in Bahrain. The nation's king declared a state of emergency on Tuesday, giving the military sweeping authority to confront the opposition movement. Also, a Saudi official said that a Saudi sergeant was shot and killed by a protester in Bahrain's capital.
Saudi Arabia's benchmark Tadawul All Shares Index closed down 3.5 percent at almost 6,012 points, while the Dubai Financial Markets index rebounded from steeper losses earlier in the day to close 1.9 percent lower. The losses affected companies in all sectors.
Investor unease with the situation in Bahrain was reflected in the cost of insuring its debt. The five-year credit default swap for Bahrain surged by 40.88 basis points, to 347.2 basis points, according to financial data provider CMA.
"It's a combination of factors," Shaheen Hosni, a Dubai-based sales manager with Mideast investment bank EFG-Hermes' brokerage arm, said, referring to the declines in the markets. "We're mostly affected by regional issues, and Japan came over and above what's happening regionally."
The massive earthquake and tsunami last week in Japan has devastated the country, and fears of radiation leaks from a nuclear facility are further enflaming sentiment. Japan's Nikkei stock index plummeted nearly 11 percent Tuesday while other major world markets also slumped, but by far less.
The losses in Saudi Arabia and Dubai, the two biggest Gulf markets, were echoed on a smaller scale elsewhere in the oil rich region.
Kuwait's stock market's benchmark index closed down 1.2 percent to 6,324 points while Qatar's benchmark was off 1.6 percent. Oman, another Gulf neighbor embroiled in protests, fell almost 1.7 percent.
In Dubai, developer Emaar Properties, the force behind the world's tallest building, was down almost 2.5 percent at 2.74 dirhams, while the Dubai Financial Market's own shares were off 5.56 percent to 1.19 dirhams.
The deployment of the troops in Bahrain was the latest bid by the GCC to cap unrest that has come dangerously close to their shores. The regional bloc on Thursday had announced a $20 billion financial aid package for Bahrain and Oman, to be divided evenly between the two countries over a period of 10 years.
The money was aimed at helping the two countries deal with some of the underlying economic issues that have fueled anger in the Arab world.
But the GCC also issued a stern warning against what it described as "foreign intervention" in its member countries' affairs _ a jab apparently directed at Iran. The Shiite nation is seen by GCC members are possibly enflaming sectarian tensions in the region, such as by encouraging the Shiite majority in Bahrain to move against the Sunni minority from which the country's king hails.
The political unrest has weighed heavily on the markets in the Gulf.
EFG-Hermes' Hosni said that the regional markets are already weak, leaving them vulnerable to sentiment based trading.
"What's going to happen tomorrow most likely looks to be negative," he said. "But regardless of what happens in one single day, the markets are weak."