Camille Van Vyve
26 Jul 2022
Stories of crises and recoveries: the Gulf War
On the night of August 2, 1990, Iraqi tanks invaded Kuwait, leading to a sharp rise in oil prices and a crash in financial markets. An armed conflict followed between Iraq and a coalition of 35 countries including Belgium, led by the United States. Against all expectations, this third world war only had a limited impact on the markets.
What is the context?
We are two years after the Iran-Iraq war, which left Iraq bloodless and riddled with debt. Tension is rising in the area, with Iraqi debt mainly held by neighboring countries Saudi Arabia and Kuwait. Iraq, which claims sovereignty over the territory of Kuwait, also accuses its neighbor of exceeding the oil production quotas set by OPEC. The casus belli comes when Kuwait is suspected of drilling on the Iraqi side of the border between the two countries.
In the United States, the slowdown awaited
The shock also comes in a fragile economic climate. After ten years of interrupted growth, the slowdown had begun in the United States at the start of the year and the signals began to light up little by little from the spring. But the war amplifies the trend and, above all, acts as a catalyst on American consciences.
Markets crash
Following the invasion of Kuwait, the CAC 40 lost up to 27% – more than on Black Monday – the S&P 500 almost 17% and the BEL 20 only 7%.
The international community reacts
First punished by economic sanctions, Iraq was finally attacked following a UN resolution authorizing the use of force. In the fall, US President George Bush deploys US forces to Saudi Arabia and urges other countries to send their own armies into the field. Many nations join the coalition, including Belgium, making it the largest military alliance since World War II.
Markets anticipate good news
After two months of military preparations during Operation Desert Shields, the actual war broke out on January 17, 1991 under the code name Desert Storm. It will last a month and a half, a period during which the markets will recover with several weeks of consecutive increases. Not only do the markets anticipate victory, but they also factor in other elements: the fact that the conflict remains confined to a particular territory, that its impact on oil prices and therefore on inflation is virtually zero and finally, that the cut in rates operated by the American central bank to revive the economy seems to be bearing fruit.
1991, a boom year for the American stock market
Encouraged by this good news, the American stock market wiped out its losses as soon as the conflict ended. The S&P 500 even closed the year up 26%! However, it took until early 1992 for the CAC 40 to fully recover from the crisis. But for the investor exposed to the world market, the loss will have been erased as of February 11, 1991, even before the end of the conflict!
Read other episodes in this series about market crashes and recoveries : the tulip crisis , Black Monday, the Greek debt crisis