Egypt Riskier Than Iraq in Swaps as Protests Spread to Mubarak

January 27, 2011, 12:40 PM EST

By Alaa Shahine and Jason Webb

Jan. 27 (Bloomberg) -- Egypt is riskier than Iraq in the market for credit default swaps for the first time in at least a year after protests denouncing President Hosni Mubarak.

The cost of protecting Egyptian debt against default for five years with the contracts jumped 69 basis points, or 0.69 percentage points, this week to 375 today, compared with 328 for Iraq, according to prices from CMA, a data provider in London. Just last week, Iraqi swaps cost 19 basis points more than Egypt’s, and in June, an average 240 basis points more, as Iraq recovered from the U.S.-led invasion in 2003.

The unrest, inspired by the revolt that toppled Tunisia’s leader, “does raise political risks,” said Eric Fine, a portfolio manager in New York who helps Van Eck Associates Corp. oversee $3 billion in emerging-market assets. “If this is a revolution, the price of risk for Egypt could go much higher, and if it’s a failed one” the cost will drop to 300 basis points and probably 250, Fine said in a phone interview.

Higher borrowing costs may crimp Egypt’s ability to meet its target of cutting the budget deficit to 3 percent of gross domestic product by 2015 from the current 8 percent. Yields at the government’s debt auction climbed this week. The average rate on 91-day bills rose 30 basis points from the previous sale to 9.5 percent, while the yield on 182-day bills advanced 20 basis points to 10.2 percent, data compiled by Bloomberg show.

Will Mubarak Run?

The yield on Egypt’s 2040 dollar-denominated bonds jumped 50 basis points since Tunisian President Zine El Abidine Ben Ali was ousted on Jan. 14 to 7.10 percent, the highest level on record, according to data compiled by Bloomberg. Mubarak, 82, has been in power since 1981 and hasn’t said whether he will run in the September elections.

Protesters continued for a third day in cities such as Suez and Ismailia. Yesterday police used teargas and charged with truncheons to disperse the crowd. Truckloads of riot police were deployed across the capital.

The benchmark EGX30 index slumped 11 percent today to 5,646.50 at the close in Cairo, bringing the drop for the year to 21 percent. The gauge gained 15 percent in 2010

Cairo-based investment banks EFG-Hermes Holding SAE and CI Capital, and London-based Barclays have forecast Egypt’s pound will drop against the dollar this year. The currency lost 0.4 percent to 5.8580 per dollar at 5:33 p.m. today in Cairo.

Swaps Soar

Egypt’s five-year credit-default swaps soared 30 basis points today after a 17 basis points surge yesterday. Iraq’s were little changed this week. Credit-default swaps conceived to protect bondholders against default pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Egypt’s Finance Ministry auctioned 10.5 billion Egyptian pounds ($1.8 billion) of Treasury bills this week with maturities ranging from 91 days to one year. The government plans to issue 6.5 billion pounds on Feb. 1, according to data compiled by Bloomberg.

Finance Minister Youssef Boutros-Ghali didn’t respond to an e-mail seeking comment.

The economy may grow at least 6 percent in the fiscal year that ends in June, Prime Minister Ahmed Nazif said in September. The International Monetary Fund expects the economies of the Middle East and North Africa to expand 4.6 percent this year, according to its World Economic Outlook.

Jerome Booth, who helps manage about $47 billion in emerging markets assets as co-founder and head of research at Ashmore Investment Management, said it was still “too early to say” whether the unrest in Egypt will cause “any significant change to sovereign creditworthiness.”


“We have to be a little less prejudiced against economies in North Africa, which actually have pretty strong economies and a clear incentive for whoever’s running the country to honor their obligation,” Booth said in a telephone interview from London yesterday.

Egypt is rated BB+ at Fitch Ratings and Ba1 at Moody’s Investors Service, the highest non-investment grade levels. Iraq’s 2028 dollar bond isn’t rated and rose for the first time in six days yesterday, pushing the yield down less than 1 basis point to 6.4 percent, according to data compiled by Bloomberg.

The assessment of U.S. President Barack Obama’s administration is that “the Egyptian government is stable,” Secretary of State Hillary Clinton said.

The U.S. relies on Mubarak as a mediator in the Palestinian-Israeli conflict, and Egypt is the second-biggest recipient of American foreign aid after Israel. Relations were strained during the administration of President George W. Bush, who repeatedly called on Mubarak to allow more freedoms.

Mubarak Survival

The protests in Egypt’s cities including Cairo followed the uprising in Tunisia, where Ben Ali was ousted after 23 years in power.

Mubarak will probably survive the protests as strong ties between the ruling National Democratic Party and the military means that a repeat of Tunisia’s uprising is unlikely, Richard Fox, Fitch’s London-based head of Middle East and North Africa Sovereign Ratings, said in a conference call today.

“The military has long been the lynchpin of stability in Egypt and our base case at this stage would be that stability will be restored in due course,” Fox said.

Tunisia’s revolt began in December after a 26-year-old set himself on fire following a dispute with local officials. The demonstrations after his death turned into protests against perceived corruption and human-rights violations.

Protests followed in Algeria, Yemen, Sudan and Egypt, all facing high unemployment and rising inflation, a mix of problems that prompted analysts at Barclays Capital to say this month that the risk of Tunisia’s unrest spreading to other countries in the region “is not negligible.”

“One thing that we can all take from the Tunisian situation is that the unexpected can sometimes happen rather quickly,” Fox said. “It would be a brave man who would try to expect what would happen in Egypt between now and the election.”

--Editors: Claudia Maedler, Gavin Serkin, Riad Hamade

To contact the reporter on this story: Alaa Shahine in Dubai at Jason Webb in London at

To contact the editor responsible for this story: Claudia Maedler at; Gavin Serkin at
Source: BusinessWeek
Egypt Riskier Than Iraq in Swaps as Protests Spread to Mubarak - Businessweek