The Cost of Sovereign Lending In The Middle East After September 11 Mahmoud M. Haddad Dept. Acct., Econ., Fin., & Int’l. Business 214 Business Administration Building University of Tennessee-Martin Martin, TN 38238, USA 731-881-7249 731-881-7241 Fax E-mail: mhaddad@utm.edu URL: http://www.utm.edu/~mhaddad and Sam R. Hakim Pepperdine University Graziadio Graduate School of Business & Management 6100 Center Drive Los Angeles, CA 90045 Email: sam.hakim@pepperdine.edu Phone: +1 (626) 233-1009 Abstract One of the casualties in the aftermath of the attacks on September 11 has been global confidence in the Middle East. Sovereign risk - the credit risk assessment to the obligations of central governments  is believed to have increased. In response, credit rating agencies like Moodys and Standard and Poor (S&P) have revised their ratings or placed specific countries on their watch list, a move which normally precedes a credit downgrade. Using data from JP Morgan, Moodys, S&P, and the World Bank, we explain and quantify the variability of sovereign risk in five MENA countries between 1998 and 2002. Our results show that the sovereign risk is sensitive to the variability in the current account, a countrys credit rating, and per capita income. Further tests of the impact of September 11 on the region reveal that its sovereign risk has risen by 135 basis points on average. Three immediate implications emerge from our results. Our findings help policymakers in MENA countries (1) better understand how financial markets are pricing their risk, (2) identify the specific risk bins which influence their credit spreads, and (3) suggest mitigation techniques on how their sovereign risk can be reduced. Presented at EcoMod Annual Conference on Middle East and North African Economies: Past Perspectives and Future Challenges Brussels, June 2-4, 2005 Version: April 2005 Please do not quote without authors permission Copyright 2005, Haddad & Hakim