Business executives in the GCC will be nervously watching the outcome of elections in Greece today.
Billed as a referendum on whether Greece will stay in the euro zone, the result could have a far-reaching impact beyond the single-currency bloc.
Analysts fear a euro-zone break-up and the rush from banks to build capital to protect themselves against the turmoil could lead to the most severe credit crunch since the global financial crisis of 2009.
Under such a scenario, GCC financial markets would be hit by the shock waves.
"Financial linkages are the most concerning as the consequences could be severe," analysts at Emirates NBD warned in a research report released last week.
"European banks may be required to pare assets and credit exposures, including to the GCC."
Lenders from the continent have played an active part in the region's growth, helping fund everything from the Palm islands off Dubai's coast to expansion in small and medium-sized enterprises (SMEs). Banks, especially in Bahrain, depend on European lending through the local interbank market.
But it is companies that are the most heavily reliant on European bank lending.
Entities in the UAE owed US$86 billion (Dh315.83bn) to European banks as of the end of last year, according to data from the Bank for International Settlements (BIS) and Emirates NBD. British banks were owed $56bn of that amount, with UAE entities owing $30bn to continental banks. In contrast, Saudi Arabia's reliance on European bank lending is much smaller.
Even more vulnerable are the financial systems of Qatar and Bahrain. Qatar's rapid rush to build its infrastructure as it prepares for the 2022 Fifa World Cup means its reliance on European banks has grown quickly. Foreign bank liability to total assets in the country's banking system is 23 per cent, more than double that of the UAE, and up from 19 per cent in December.
Bahrain, too, has high debts. Cross-border claims, generally loans from international, especially European, banks, account for 60 per cent of GDP in the kingdom.
But the exact impact of a so-called "Grexit"on credit growth in the region is tricky to determine.
Credit Suisse analysts estimated last week that if Greece were to leave and be followed by Spain, Ireland, Italy and Portugal, lending by European banks would contract by about €1.3 trillion (Dh6.03tn). That, of course, is the worst-case scenario.
Even so, there are already signs European banks are scaling back their exposure to the region as the single-currency crisis escalates.
"A number of euro-area commercial banks have pulled out of syndicated as well as bilateral lending to UAE and other GCC member countries to meet new capital adequacy criteria to be in force in Europe on July 1 as well as to reduce exposures to a region for which risk-aversion has become the watchword," said Elliot Riordan, a senior economist at the World Bank.
Lending by euro-zone banks outside the borders of the single currency bloc dropped by 40 per cent in the first three months of this year compared with the same period of last year, BIS data shows.
A Greek exit would be likely to accelerate the credit pullback.
The GCC is better prepared for a credit tightening than it was when the collapse of Lehman Brothers in 2008 triggered a freezing of international capital markets. Large chunks of corporate debt have been paid off and the credit bubble of 2008 has deflated.
But a euro-zone break up would still make it trickier for companies to refinance debt and raise new funding.
One problem for the region is that a significant lump of its reliance on foreign and, in particular European, bank funding is short term. More than 50 per cent of cross-border claims mature by the end of the year.
"The funding conditions for regional corporates are less than ideal as banks are not growing their balance sheets and the environment is volatile," said Timucin Engin, the associate director of financial services for Central and Eastern Europe, the Middle East and Africa at Standard & Poor's.
The IMF estimates UAE Government-related entities have as much as $30bn in debts due this year.
For companies looking to refinance debt, sales of sukuk and other bonds may help to fill the void.
Local banks are also expected to pick up some of the shortfall. They have much higher capital adequacy ratios than their European peers thanks to an injection of liquidity from their governments in 2008 and 2009 and a cleansing of bad loans.
But they cannot mop up all the demand.
"Domestic banks are unlikely to be able to plug the entire gap left by foreign banks," wrote economists at Capital Economics in a research report last week.
It warned that SMEs too small to access bond markets would be hardest squeezed.
Credit conditions are already expected to stay tepid in the region this year as some banks continue to build safeguards against non-performing loans. Lending growth is forecast by S&P to be 4 per cent in the UAE this year.
Borrowing in the UAE is already set to be constrained by rules due to come in from September 30 limiting banks' exposure to the Government and companies linked to the state.
A dramatic outcome to the Greek elections could trigger another drag on lending growth.
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