Disaster Ahead… Investors Flee Egyptian Treasury Bills As Radical Islamists Take Over Parliament

Arab Spring.

Interest rate on 9-month treasury bills. (Asia Times)

Investors bought less an a third of the Egyptian Treasury bills offered to the market this week. This came on the same week that the Islamists took over the Egyptian Parliament. Certain financial disaster awaits the most populous Arab country.
The Asia Times reported:

Investors bought less an a third of the 3.5 billion Egyptian pounds (US$580 million) worth of Treasury bills offered to the market on January 22, a red flag warning that Egypt’s foreign exchange position is close to the brink.

Yields on Egyptian government debt maturing in nine months jumped to nearly 16% , but the government could not place its local-currency debt to Egyptian investors, even at that exorbitant rate.

This is a new and ominous decline in the financial position of the most populous Arab country.

Egypt faces a disaster of biblical proportions, and the world will do nothing about it. Officially, Egypt’s foreign exchange reserves fell by half during 2011, including a $2.4 billion decline during December – from $36 billion to $18 billion, or about four months of imports.

But the situation almost certainly is worse than that. More than $4 billion left the country during December, estimates Royal Bank of Scotland economist Raza Agha, noting that the December drop in reserves was cushioned by a $1 billion loan from the Egyptian army and a $1 billion sale of dollar-denominated treasury bills.

The rush out of the Egyptian pound is so rapid that Egyptian investors refuse to hold debt in their own national currency, even at a 16% yield. After Islamist parties won more three-quarters of the seats in recent parliamentary elections – 47% for the Muslim Brotherhood and 25% for the even more extreme al-Nour Party – the business elite that prospered under military rule is counting the days before exile.

The first reports of actual hunger in provincial Egyptian towns, meanwhile, are starting to trickle in through Arab-language press and blog reports. A shortage of gasoline accompanied by long queues at filling stations and panic buying was widely reported last week.

In some towns, for example Luxor in Upper Egypt, the disappearance of diesel fuel shut down bakeries, exacerbating the spot shortages of bread.

After months of refusing to bargain with the International Monetary Fund (IMF), Egypt’s government has begun negotiations for a $3.2 billion loan, or less than the amount of capital flight in December alone. The involvement of the IMF evidently did little to reassure the Egyptian investors who sat out Sunday’s Treasury auction.

It seems unlikely that Egypt’s central bank will be able to prevent a banana-republic devaluation of the Egyptian pound, and a sharp rise in prices for a population of whom half barely consumes enough to prevent starvation. The difference between Egypt and a banana republic, though, is the bananas: unlike the bankrupt Latin Americans, who exported food, Egypt imports half its caloric consumption…

Nearly half of Egyptians are functionally illiterate. Nine-tenths of adult women have suffered genital mutilation. Almost a third of Egyptians marry first or second cousins, the fail-safe indicator of a clan-based society. Half of Egyptians live on less than $2 a day, and must spend half of that on food.

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