Egypt Political Crisis Sends Cost of Debt Insurance Soaring – FT

Egyptian financial markets have been rattled by a deepening political crisis in the pivotal Arab state, sending the cost of insuring against a government debt default to a record this week.

A combative speech by Islamist President Mohamed Morsi late on Wednesday failed to assuage fears that Egypt’s various political movements could clash violently at a planned mass demonstration of government opponents on Sunday.

Abdel Fattah al Sisi, the defence minister, late last week warned that the military would not allow the country to slide into a “dark tunnel” of civil war, and might intervene if the Islamists and their opponents could not reach an accord.

Political tensions are exacerbating concerns over the country’s gaping budget deficit and swelling debt burden. Egyptian credit default swaps, a kind of insurance against debt defaults, climbed 12.5 basis points to a new record of 887.5bp on Thursday, according to CMA, a data provider.

This means it costs $887,500 a year for five years to insure $10m of Egyptian debt, the fifth highest in the world after surpassing Pakistan this week. Only Argentina, Greece, Venezuela and Cyprus are seen as more at risk of default than Egypt.

“At the moment there’s no need for a debt restructuring. The question is how long they can muddle through,” says Anthony Simond, an analyst at Aberdeen Asset Management in London. “At one stage they will get to a crunch point.”

Cairo’s stock market clawed back some of its losses after touching a one-year low on Monday, but it has fallen almost 14 per cent this month. Also, the yield of Egypt’s 2020 bond briefly breached the 10 per cent mark on Thursday.

Opposition efforts to oust Mr Morsi appear to have gained traction in recent weeks, amid rising public discontent at his presidency.

Fuel shortages and power cuts have become more frequent as falling foreign reserves have limited the government’s ability to pay for imports. The devaluation of the Egyptian pound has fuelled inflation, adding to the hardships faced by a mostly poor population.

The opposition is expected to bring out large crowds on the streets on Sunday, but the president’s Muslim Brotherhood supporters and an array of other Islamist groups, including former jihadis, have vowed to defend his legitimacy and crush his opponents.

Many Egyptians fear that a violent confrontation is likely. In recent days bouts of street fighting pitting opponents and supporters of the regime have broken out in provincial towns, claiming the lives of at least five people.

The political tensions are worsened by – and reinforce – Egypt’s economic and financial woes. While negotiations with the International Monetary Fund on a $4.8bn support package have proven protracted, Egypt has so far been able to cope thanks to help from oil-rich Arab states and a robust domestic banking sector.

Deposit-rich local banks have been able to finance the growing budget deficit, and Qatar, Iraq and Libya, among others, have provided dollar deposits and loans to ease a shortage of foreign currency.

However, borrowing from local banks is becoming more expensive, exacerbating the cost of servicing Egypt’s growing debt pile, and experts predict other Arab states will not be willing to fund Cairo indefinitely.

Source: Financial Times