Bahrain's dinar recovered from 17-year lows and its bond prices rebounded on Wednesday after the country's diplomatic allies in the Gulf pledged to prevent its ballooning public debt from triggering a financial crisis. Bankers said the pledge of aid to Bahrain by Saudi Arabia, the United Arab Emirates and Kuwait eased fears that Manama might be unable to redeem a $750 million Islamic bond that will mature in November.
"It's time to buy Bahrain," Barclays said in an analyst report, predicting the aid pledge would ease international investors' worries about the country's solvency. However, the cost of insuring Bahrain's debt against default remained high on Wednesday, suggesting many investors were still sceptical about the country's ability to stabilise its finances over the long term without repeated injections of aid.
The dinar bounced to 0.37850 against the US dollar in early spot market trade. On Tuesday, it had dropped as low as 0.38261, moving away from its official peg of 0.37608 as hedge funds dumped Bahraini bonds. The currency also recovered in the forwards market, which reflects expectations for its value in coming months.