CAIRO — For years, it cast itself as a banking oasis, an island of transparency in the financially opaque Gulf Arab region. Less flashy than Dubai, but more freewheeling than Saudi Arabia, Bahrain strove to give Gulf traditions a Western veneer.
Now, the tiny island is coming undone. Protests like those that toppled leaders in Tunisia and Egypt are going strong, leading major ratings agencies on Thursday to downgrade it or issue warnings. But behind the economic concerns murk broader fears that trouble in Bahrain will spark a chain reaction across the oil-rich Gulf.
With oil prices charging past $100 per barrel because of the Libyan uprising, analysts say other Gulf nations could step up and offer major aid to their offshore neighbor.
"Traditionally, the role of Saudi Arabia has been to support Bahrain financially, as much as possible," said John Sfakianakis, chief economist with Banque Saudi-Fransi, based in the Saudi capital, Riyadh. "Any challenges to the financial stability of Bahrain would always necessitate vigilance from Saudi Arabia and, eventually, lead to direct support."
Said Hirsh, Mideast economist with the London-based Capital Economics, added: "I would be very surprised if Saudi Arabia doesn't offer some kind of assistance."
Economists and analysts have played down the likelihood that popular protests seen in other Arab states will take on same ferocity in the Gulf.
Saudi Arabia, Kuwait, Qatar and the United Arab Emirates — all members of the Organization of the Petroleum Exporting Countries — have abundant oil money to try to spend their way out of popular discontent. Saudi Arabia's king met with his Bahraini counterpart Wednesday, and also announcing almost $37 billion in measures to ease financial and social problems for Saudis.
Analysts also acknowledge an element of uncertainty in the region, noting that the situation could quickly decay if governments resort to force to quash unrest.
Bahrain, where protests have largely focused on the Shiite majority demanding more rights from the Sunni-minority leadership, unleashed its military on the protesters. It quickly pulled them back, however, amid international outcry.
"Reversion by the (Bahraini) authorities to violent suppression would, in our view, risk sparking unrest in nearby Saudi Arabia among a Shia minority which dominates one of the Kingdom's major oil-producing regions," said brokerage giant Nomura in a recent research note.
The oil factor is a major headache for the international community, even though Bahrain is neither an OPEC member nor a Gulf oil baron. The government relies on oil revenues for much of its revenue, and Moody's Investors Service said Bahrain's expansionary budget requires a break-even oil price of between $97 to $100 per barrel — significantly higher than other Gulf oil producers.
The popular rebellion in Libya has shuttered much of that OPEC member's output and exports, driving the U.S. crude oil benchmark futures contract well past $100 before it retreated Thursday. The London-based Brent futures contract climbed as high as $116 per barrel. Both contracts surged more on fear than on actual indications of immediate supply shortages.
While OPEC kingpin Saudi Arabia can offset a Libyan production shortfall, OPEC's spare production capacity would be largely tapped out should another key oil producer face a disruption. Unrest in Bahrain is fueling those worries.
"Trim your risk and then wait and see, in case some clarity turns up," said Credit Suisse in a research note. "This is pretty much what the markets seem to be doing in response to Bahrain and Libya."
But as markets await clarity, Bahrain's image is taking a pummeling.
Its vibrant tourism industry took a hit this week when the kingdom announced it was calling off Formula 1's season-opening Bahrain Grand Prix — a decision clearly linked to the protests. The event is normally a major revenue source for the country's hospitality sector and brings in television exposure that promoters hope will attract more visitors.
On Thursday, Standard & Poor's placed Bahrain-based insurers Bahrain Kuwait Insurance Co. and Takaful International Co. BSC. on "CreditWatch Negative," citing the mass unrest that prompted the earlier downgrade of the Gulf nation's sovereign rating. The agency explained its move by saying that under its ratings criteria, sovereign risk "is a key factor influencing the financial strength of insurers."
Separately, Moody's announced a two-notch downgrade of Arab Banking Corp. to Baa3/Prime-3 from A3/Prime-2. The Bahrain-based bank, which is 59.4 percent controlled by Libya's Central Bank, had seen its ratings cut by S&P a day earlier because of the Libya violence and expectations that the North African nation would not continue to provide the same level of support to ABC.
Moody's also said it was initiating a review for possible downgrade of the Bahrain-based Gulf International Bank.
Other Bahrain banks have seen their ratings either downgraded or placed on review, in a flurry of moves that cast a pall over the country's financial institutions. Ratings agencies are worried about Bahrain's ability to support its banking sector.
Banking is what has made the country famous.
Equally pint-sized Dubai managed years ago to snatch the title of regional financial hub from Bahrain, although Dubai famously imploded amid the global financial meltdown. It has been forced to rely on its oil-rich sister emirate, Abu Dhabi, for a bailout.
While Dubai's position as the regional financial hub remains unchallenged, its finances remain a mystery to many, despite pledges of greater transparency.
Bahrain, meanwhile, had set its sights on growing its Islamic and offshore banking businesses, and analysts say its key clients have been Saudi businessmen. Transparency and accountability were the rule — and enforced with more rigor than the largely cosmetic crackdowns on the prostitution that turned Bahrain into a favorite weekend haunt for Saudis.
If Dubai found a benefactor in Abu Dhabi, then Bahrain found an even bigger one in Saudi Arabia.
"Bahrain is to Saudi Arabia what Mexico is for the United States," said Sfakianakis, adding that Bahrain's economy of roughly $30 billion to $35 billion is smaller than that of the Saudi capital. "The financial stability of Bahrain will be maintained, if there is a need."