About 120 people attended a November 20 breakfast event with Citigroup’s chief economist, Willem Buiter, at the Conrad Cairo Hotel. Buiter offered his take on the European sovereign debt crisis, together with advice for Egypt’s transition.
With the European sovereign crisis and the American fiscal stalemate, Buiter reassured Egypt that emerging markets, which account for more than 40 percent of world GDP, are doing well.
Focusing on the sovereign debt crisis, Buiter disputed the notion that there is such a thing as safe sovereign debt. He claimed that the remaining triple A ratings exist only because ratings agencies “fear for their lives.” Still, he argued that ratings agencies are so overregulated that governments are virtually rating themselves. He describes such regulation as “the most ludicrous idea since Caligula made his horse a consul.”
The fact that Spain and Italy borrow 10 billion euros weekly means that failed debt auctions are inevitable, Buiter said, comparing governments to banks that roll over debt regularly to cope with short maturities.
Having set the scene, Buiter recommended that Europe take three actions to prevent the collapse of the common currency: restructure sovereign debt, ringfence (group assets to protect) systemically important sovereigns and recapitalize banks. While restructuring is under way in Greece, Spain and Italy’s combined 2.5 trillion-euro debt could create a “global financial catastrophe” if not ringfenced, he said. Buiter believes that the 3 trillion euros available in the eurozone means European economies can take these actions “without threatening their underlying inflation and monetary stability mandate.”
The question-and-answer session shifted discussion to the implications for Egypt. With rapidly depleting foreign reserves representing just over four months of import cover, Buiter said reserves could be exhausted early next year. That would force the government to take radical measures and end its propping up of the Egyptian pound. Citigroup recommends a gradual and orderly devaluation of the pound and expects the exchange rate against the dollar to reach LE 7.5 by the end of 2012.
Despite his gloomy economic portrayal, Buiter said he expects a steady 7 to 8 percent medium-term growth rate for Egypt if the country manages to boost investment and savings, and end its currency overvaluation, among other measures.